What the Fed Thinks - Market Fact

Feb 20, 2013 | by Franck Cushner, CFP®

The Federal Reserve is made up of 12 districts across the country, with each district being governed by its own President. Each district president has the ability to project their own assessment and opinion of the policies being under taken by the Fed.

Some members of the Federal Reserve have expressed concern with the continuation of quantitative easing programs. These programs were put into place to stimulate economic growth by maintaining a low rate environment. However, some dissent surfaced in January as two members commented on the rising risk of inflationary pressures.

Federal Reserve Bank of St. Louis President James Bullard said it might be difficult to tie the central bank’s $85 billion monthly bond purchases to numerical levels of unemployment and inflation. Bullard told reporters “it’s a very aggressive policy and it is making me a little bit nervous that we’re over- committing to easy policy.”

In separate comments, Kansas City Fed President Esther George remarked that “a prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the” Fed’s 2 percent inflation goal.

She also went on to say that the Fed’s record stimulus might fuel the risk of financial instability and a surge in inflation.

In addition, minutes of the Fed’s December meeting show a split among policy makers over how soon the current Q.E. program should end. “Several” members of the FOMC said it would “probably be appropriate to slow or stop purchases well before the end of 2013”.  A “few” were willing to let the program run to the end of the year while “a few others” didn’t give a time frame.

The Fed’s current targets include an unemployment rate of 6.5 percent, while holding inflation steady at no more than 2.5%. Until these targets are met, the Fed plans to maintain short-term rates as low as they are.

Five Fed staff economists believe that the central bank (Fed) may eventually have to sell the government bonds it has been buying through its quantitative easing programs at losses once the economy finally picks up. The Fed is currently a buyer of mortgage backed & Treasury securities at $85 billion per month. As the Fed buys this debt on the open market, it places what it has purchased on its balance sheet, which has swollen to over $3 trillion. The Fed estimates that its balance sheet will reach $3.75 trillion by year-end with its current Q.E. programs.

The dynamic endangering the Fed’s balance sheet is that of devaluing bond prices as interest rates rise. Eventually, the markets will have to absorb what the Federal Reserve will be selling off its sizable balance sheet.

 

Sources:         Federal Reserve Bank

460 Park Ave, 21st Floor, New York, NY 10022

Ph. (212) 489-1800

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