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. Fed 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.
“It’s not a welcome development that a lot more time and focus is spent on answering questions” from Congress, said Rosner, a former researcher at the Federal Reserve Bank of New York. Lawmakers may also use the size of the balance sheet to “draw attention to concerns they have about the Fed’s responsibilities and growing role in financial regulation.”
Chairman Ben S. Bernanke, whose second four-year term ends next month, has quadrupled Fed assets since 2008 with bond purchases intended to lower long-term borrowing costs and reduce unemployment. Vice Chairman Yellen, who may win Senate confirmation this week to replace Bernanke, has been a supporter of the policy.
The Fed has said it will keep buying bonds until the outlook for the labor market has “improved substantially.” Thirty-four percent of economists surveyed by Bloomberg Dec. 6 predicted the Fed will start reducing purchases this month, while 26 percent forecast January and 40 percent said March.
The Fed’s balance sheet exceeds the gross domestic product of Germany, the world’s fourth-largest economy. It’s enough to cover all U.S. federal government spending for more than a year. It could pay off all student and auto loans in the country with $2 trillion to spare, Fed data show.
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