The second main function the Fed uses for economic control is to create money from nothing and buy real assets usually in the form of government debt (US Treasuries), thus increasing the balance sheet of the Federal Reserve (they can then decide to let their holdings mature and roll off their balance sheet or to continue purchasing).
Bonds only serve to reduce reserves in the banking system. As an asset swap, they cannot "fund" anything. However, interest paid on Treasury instruments also increases reserves when they mature which must be covered by Congress in the non-discretionary budget.
The net effect of increasing the ROI of bonds to dampen an overheated economy is being questioned by many economists. At best, it serves as welfare for the already wealthy and widens the gap between capital and labor. It's difficult to explain how making everything more expensive is conducive to fighting inflation unless one disregards the damage done to America's working class as "collateral".
the problem is that eventually the Fed needs to shrink its balance sheet by letting its debt mature to prevent massive inflation and the US will need to pay off those bonds or risk a default,
This line of thought ignores the fact that the Fed and Treasury share a balance sheet that erases any common debt/asset imbalance between them.
With the US operating under significant budget deficits for many years the Government has relied on new debt to pay off interest on old debt, but once new debt stops or slows down the risk of default increases drastically.
A sovereign issuer of a fiat currency cannot involuntarily default on any obligation denominated in the currency it can create at will. Only some extremely stupid action from Congress, such as failure to understand the way our government funds itself and what deficits represent (not raising the debt ceiling) could cause such a situation.
I'm not even sure such action could pass the test of the SCOTUS in determining the role our government plays in the economy and the mandate Congress has in our Constitution to provide currency for "the common welfare". Rest assured that those who aren't terminally stupid at the helm of our "real" economy will never let such absurdity happen because some elected yokels believe their own BS.
there is an increasing pressure for foreign countries to decrease their exposure to U.S. debt as the American economic system begins to unravel, China the third largest holder of U.S. Treasuries has begun to decrease exposure (Figure 3.1) and Russia has drastically sold off U.S. government debt between March and May of 2018 selling %84 of its total U.S. debt holdings.
Any "unraveling" currently is caused by our complete failure to invest in our future productivity in deference to the existing status quo special interests, not the amount of currency we have in our mostly dysfunctional and wildly misdistributed economy.
China and Russia are the current scapegoats of politicians and are very likely to be damaged by our propensity to sanction anything that doesn't support our global capitalists/imperialists. Their holdings represent real resources that they invested and it's difficult to fault them for not wanting to be deeper in our clutches.
To keep it short and simple the U.S. has operated at artificially low interest rates and massive budget deficits for decades but now the system which relied on new money to service its debt burdens is collapsing.
What makes a particular rate of interest "artificial"? I know economists who believe that should apply to any above zero and that we should institute a zero interest on reserve policy in place of Treasury bonds. This would force Congress to use taxation to mop up excess reserves in the system, which would incentivize reinvestment instead of relying on capital gains to offset inflation.
It would also require a higher level of econ literacy and far less corruption in Congress, which might be its primary drawback. As long as policy makers view the federal budget deficit as if it were their own kitchen table checkbook balancing we're pretty much screwed. Economic advisors who aren't aware of the fact that federal deficits are the only payment for the real resources and labor the government demands from the private sector and the only net source of monetary assets that can net retire private sector debt or be net saved don't help the cause.
