American dollar cut into shape of the United States

Whose QE Was it, Anyway?

Years before the 2008 financial crisis, foreign central banks’ ownership of US Treasuries began to catch up with – and then overtake – the Federal Reserve’s share. Indeed, tighter liquidity conditions and increased volatility in financial markets are the byproduct of the reversal in this long cycle of foreign purchases.

CAMBRIDGE – Between 1913 (when the United States Federal Reserve was founded) and the latter part of the 1980s, it would be fair to say that the Fed was the only game in town when it came to purchases of US Treasury securities by central banks. During that era, the Fed owned anywhere between 12% and 30% of US marketable Treasury securities outstanding (see figure), with the post-World War II peak coming as the Fed tried to prop up the sagging US economy following the first spike in oil prices in 1973.

We no longer live in that US-centric world, where the Fed was the only game in town and changes in its monetary policy powerfully influenced liquidity conditions at home and to a large extent globally. Years before the global financial crisis – and before the term “QE” (quantitative easing) became an established fixture of the financial lexicon – foreign central banks’ ownership of US Treasuries began to catch up with, and then overtake, the Fed’s share.

The purchase of US Treasuries by foreign central banks really took off in 2003, years before the first round of quantitative easing, or “QE1,” was launched in late 2008. The charge of the foreign central banks – let’s call it “QE0” – was led by the People’s Bank of China. By 2006 (the peak of the US housing bubble), foreign official institutions held about one-third of the stock of US Treasuries outstanding, approximately twice the amount held by the Fed. On the eve of the Fed’s QE1, that share stood at around 40%.

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