Federal agencies must step back from, and leave alone, the only source of true economic growth: Private Enterprise, Private Capital and individual initiative. It is a mistake to allow one’s fear of the unknown to drive the nation to ever greater federal control over our lives.
There is no doubt the Federal Reserve is the 900 pound gorilla in the room. Their slightest move influences the market. Is that wise?
Has anyone asked what impact Fed Reserve actions have on markets and on the economy? For instance, the Fed printed $1.75 Trillion, in QE in 2009, to save TBTF banks by purchasing toxic MBS from their books. That in turn was a bailout of Congressional action with sub-prime lending through Fanny and Freddie. After all that, the nation is left with $4.5 Trillion in excess Fed balance sheet and we are now concerned about how to drain that excess from the market. Why did the Fed Reserve not think of those consequences when they printed $4,5T?
Second question: what impact did the Fed have on the economy? The past eight years, in spite of massive federal monetary intervention, have resulted in the most pathetic post-recession growth in GDP in history.
Third question: do we really want a more activist Federal Reserve Monetary Policy in light of their past actions? Just because people don’t understand what the fed does or the consequences of their actions, is that any reason to bestow even greater power in this 900 pound Unknown?
Articles like this, though well researched and intelligent, totally miss the point. It is not the Fed Reserves’ job to manipulate markets or direct the economy. Their tools are far too gross, too “nuclear,” to make markets.
We have seen too many examples of the failure of excessive government: this is the path all Progressive/Socialist and Communist nations have gone. There is absolutely no safety in giving up individual freedom to an all-powerful federal agency.
– Jay Davidson
Here’s Why the Fed Will Stay Central to Markets
Returning to a precrisis playbook risks disruptions
The Federal Reserve building in Washington. Photo: Chuck Myers/Zuma Press
Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank’s precrisis role on the sidelines of financial markets, analysts and central-bank watchers say.
A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed’s balance sheet and its involvement in markets. The Fed’s assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds, according to Crane Data.
Many analysts and investors worry that significantly rolling back the Fed’s expansion, a course advocated by some in conservative circles, risks disrupting markets and the economy at a time when growth remains tepid. It would also reduce the connections the institution has built with a diverse set of Wall Street firms, beyond the group of banks it dealt with before the crisis.
The Fed has become “like an octopus,” said Jeffrey Cleveland, chief economist at Payden & Rygel, a Los Angeles money manager. “Once you get the power and you are influencing all these markets, do you really want to retreat from all that?”
Investors are already assessing how stocks and bonds might react, when the central bank begins the latest stage of its yearslong retreat from stimulus—likely later this year—by ending the practice of reinvesting the proceeds of maturing bonds into new bonds. The Fed is scheduled to publish Wednesday the minutes of its latest policy meeting, where officials may have continued their debate over the mix of policy tools they plan to use in the future.
Some Fed officials say they are attracted to maintaining parts of their current approach. Minutes of their November meeting also showed officials discussing the advantages of keeping something similar to the existing system in place, in part because it is simpler to operate than the precrisis one.
The Fed hasn’t decided the issue, but its choices will be closely watched because its leadership is in transition. President Donald Trump is preparing to fill three vacancies on the Fed’s seven-member board. The White House hasn’t named its picks, but its choices could set Fed policy in new directions, including by limiting its role in markets. Republican lawmakers have also revived legislation to subject its decisions to greater public scrutiny, and some want monetary policy conducted by preset rules.
“It’s not your father’s Fed,” said Adam Gilbert, partner at PricewaterhouseCoopers LLP and a former New York Fed official. Changes could herald “incoming policy makers who are by nature skeptical of a Fed that continues unorthodox approaches to both monetary and regulatory policy.”
New York Fed President William Dudley told an audience this month the portfolio isn’t likely to return to its precrisis size. Federal Reserve Bank of San Francisco President John Williams said this month the portfolio would be “significantly smaller” than it is today, but likely above $2 trillion in assets.
The ultimate size will be closely tied to which system the central bank decides to use to control interest rates in the future. A handful of Fed officials have already begun questioning the wisdom of returning to the blueprint for controlling rates that they used before the crisis, although they have more time to decide.
At the center of the debate is a special investment program the Fed launched in 2013. Through the facility, it lends money-market funds and others Treasurys in exchange for cash, temporarily draining excess cash from money markets and discouraging lenders from lending at rates below the target range for interest rates.
Initially, the central bank said it would reduce the capacity of this so-called reverse repo facility “fairly soon after” it had begun raising short-term rates in 2015. Today, the Fed has no current plans to do so. Mr. Dudley suggested in April the Fed likely wouldn’t phase out the facility.
Without the Fed repos, short-term rates could slip too low, and demand for Treasurys in the open market would surge, causing problems for money-market funds seeking alternative places to park cash overnight. Removing the program would “cause huge dislocations from a bond-market standpoint,” said Debbie Cunningham, chief investment officer for global money markets atFederated Investors .
A balance sheet that is smaller than today’s, yet still substantial, would enable the Fed to keep the reverse repos around. It would also support the Fed’s foreign repos for overseas accounts, where weekly balances have averaged $250 billion, up from $30 billion precrisis, as well as the $1.5 trillion in currency outstanding and changing cash-management policies at the Treasury Department.
If the Fed reduces its bond portfolio, the burden will be on private market participants to step in. In 2018, Morgan Stanley calculates investors may have to absorb $400 billion in mortgage bonds alone, a level not seen since 2008. In the past, such transitions were smoothed by the banks authorized to trade opposite the Fed, called primary dealers. Now those firms are grappling with new leverage rules, and some have less capacity.
Communicating a strategy for unwinding risks some unintended signals. In 2013, when the Fed surprised investors with talk of slowing bond purchases, financial markets convulsed, thinking the Fed meant earlier rate rises than were expected.
The Fed is wary of destabilizing the Treasury market, in particular, because of increasing lurches driven by algorithmic trading. To avoid market disruptions, former Fed Chairman Ben Bernanke wrote in a recent blog post for the Brookings Institution, “There’s no need to rush.”
Write to Katy Burne at firstname.lastname@example.org