The Federal Reserve’s balance sheet is poised to exceed $4 trillion, prompting warnings its record easing is inflating asset-price bubbles and drawing renewed lawmaker scrutiny just as Janet Yellen prepares to take charge.
The Fed’s assets rose to a record$3.99 trillion on Dec. 11, up from $2.82 trillion in September 2012, when it embarked on a third round of bond buying. Policy makers meet today and tomorrow to decide whether to start curtailing the $85 billion monthly pace of purchases.
Among Fed officials, “there’s discomfort in the sense that the portfolio could grow almost without limit,” former Fed Vice Chairman Donald Kohn said last week during a panel discussion in Washington. Kohn said there was “discomfort in the potential financial stability effects” and added: “There’s some legitimacy in those discomforts.”
Fed Governor Jeremy Stein has said some credit markets, such as corporate debt, show signs of excessive risk-taking, while not posing a threat to financial stability. Representative Jeb Hensarling, chairman of the House committee that oversees the Fed, last week said he plans “the most rigorous examination and oversight of the Federal Reserve in its history.”
While any effort to rewrite the law establishing Fed powers lacks support from Democrats who control the Senate, the scrutiny is undesirable for central bankers who believe “independence is priceless,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York.
Mr Bernanke has timed his exit wisely. Going forward, I think the Federal Reserve’s job is even harder than running FTMoney.com :) although I am sure the Fed has better hours.
What will the Fed do tomorrow? We can only guess and pre-Christmas and New Year inertia probably feels like a comfortable option. However, there would be a synergy if the man who gave us QE bowed out with a small tapering.
Whatever the headline decision, the small print will be carefully scrutinised for further clues. I expect the market to be more volatile following the Fed’s announcement. Meanwhile, the Volatility Index (VIX) has moved higher in the last three weeks.
How should active investors respond to the Fed’s decision? If Wall Street or any other market where you have positions surges higher for a few days it would be an opportunity to book a yearend profit in anything that you think is expensive and / or vulnerable. Conversely, if markets fall back on the news this would provide an opportunity to buy whatever you feel happy to hold for at least the medium term. In other words, buy-low-sell-high.
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