There's another big benefit here: the more long-term debt that the Treasury issues, the easier it will be to roll over its smaller shorter-term debt balance over the next few decades. Its reliance on shorter-term debt could create a challenge in future years as interest rates rise. Its interest costs will be much higher for securities it issues after the current environment of ultra-low rates ends.
Of course, the Obama administration might also like this effort because neither the Treasury nor the Fed needs the permission of Congress to make this happen. That, of course, is the administration's biggest obstacle with other stimulus measures.
Most of the reasons why this idea would be so beneficial have already been explained, but here's a quick summary:
- Lower long-term interest rates will help to stimulate the economy.
- The Fed will not have to increase the size of its balance sheet.
- The Fed will not have to worry about a potential loss on the program, assuming that the U.S. does not default in the next few decades.
- The Treasury would lock in hundreds of billions of dollars of long-term debt at an ultra-low interest rate, delaying some of the potential difficulties it faces created by its large deficits. This will help buy it some time to reduce its debt once the economy strengthens.
- Taxpayers would ultimately save money by paying a very low interest rate on this debt in the long-term (and much of it would come back as Fed profits anyway).
- Congressional politics would not be a barrier.
The Potential Costs
No proposal is perfect. This idea does have some downsides, but all are relatively minor.
Could Reduce the Fed's Exit Flexibility
In a couple of years, as interest rates are rising, the Fed could have a tough time selling 30-year, fixed rate Treasuries issued at low interest rates without taking a loss. If the Fed feels pressure to reduce the size of its balance sheet as the economy strengthens, this could be a problem, in theory. In practice, however, these securities would still make up a relatively small portion of the Fed's balance sheet -- less than half. So it could sell its other shorter-term securities and just let the longer-term notes pay off over time. The worst consequence that could come from less flexibility would be a bit more inflation than would be ideal.
Critics Will Complain the U.S. Is Monetizing Its Debt
Anytime the Fed is buying Treasuries, you hear people complain that the U.S. is just monetizing its debt. This is partially true, but this proposal doesn't cause the U.S. to monetize much more debt than it already would be without the new strategy. Remember, the Fed isn't expanding its holdings of Treasuries, just swapping out shorter-term bonds for longer-term bonds.
General QE Criticisms
People who don't like quantitative easing won't like this plan either. They'll complain that as the Fed lowers interest rates, banks will benefit more than the rest of the economy. They may also worry that banks will use their inflated profits to bet in ways that could make the economy worse-off, like by creating volatility in the commodities market. These critics will never like Fed stimulus, and this technique would be no exception.