Commentary Most people don’t realize that the expansion and contraction of the Federal Reserve’s balance sheet is designed to keep global trade running smoothly. The popular view, which is supported by the Fed, is that monetary policy can promote price stability, maximum employment, and moderate long-term interest rates. Few realize how the Fed moderates long-term interest rates. The widely held view is that the Fed purchases or sells U.S. Treasury and mortgage-backed securities to directly manipulate interest rates. When the Fed reduces its balance sheet by selling securities, interest rates should rise, and when the Fed increases its balance sheet by buying securities, interest rates should fall. Yet, interest rates often move in the opposite direction the Fed intends them to move without any rational explanation from the Fed. Some experts believe the Fed’s balance sheet has a minimal impact on the Treasury yields, as evident in how yields moved …