Fed Anxiety Rises as QE Increases Risk of Loss With Costs
Comment of the Day

November 08 2013

Commentary by David Fuller

Fed Anxiety Rises as QE Increases Risk of Loss With Costs

Here is the opening to another interesting report from Bloomberg
The longer the Federal Reserve continues its bond-buying stimulus, the higher the odds it will face a year without any money to give the U.S. Treasury after taxpayers received a record $88.4 billion profit in 2012.

The Fed's financial-crisis actions -- from acquiring debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc. to three rounds of quantitative easing -- have led so far to the record payments. Now, the prospect of a stronger economy and rising interest ratesmeans the value of the Fed's bond holdings will fall at the same time its funding costs climb because the central bank pays interest on the excess reserves it holds for banks.

This could cause operating losses and invite increased scrutiny from lawmakers already critical of the central bank's policies.

That's a risk central bankers are grappling with as they consider when to slow the $85 billion monthly pace of their government and mortgage-backed securities purchases.Federal Reserve Bank of New York President William C. Dudley said in a speech last month that the central bank's balance-sheet expansion does "create some budget risk" that threatens the institution's independence.

"They've done a few things to try to insulate themselves from this concern, but I suspect in the back of their minds it still haunts them," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. "It's not going to go away."

David Fuller's view Here is another reason to expect choppy markets over the lengthy medium term. However, to put this in perspective, it is more a matter of uncertainty than deteriorating economic conditions.

For more on the medium to longer-term outlook, please listen to Friday's Big Picture Audio.

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