Under President Obama, the Federal Reserve took a huge third-world size step to battle the financial crisis and the Great Recession.
The Fed purchased trillions of dollars in bonds in an unprecedented and politically charged attempt to boost economic growth. It was great for banks and the political elites in Washington.
Now, with the economy healthier — and mixed opinions about how much the bond purchases actually helped — the Fed is preparing to scale back its massive stock of about $4.5 trillion in assets.
Those holdings of mostly Treasury bonds and mortgage-backed securities are more than quadruple what they were before the crisis, and reducing them is another risky move that could affect mortgage rates, consumer prices, bank lending, stock values and federal government borrowing.
But there’s also risk to standing pat. Like any investor, the central bank could suffer losses on the bonds if it holds them too long and interest rates rise. At the same time, holding a lot of assets could make it harder to buy more if that’s needed to fight a future recession.
So Fed policymakers plan to start trimming their holdings this year. The fanfare has made the once-boring institution a political target and shaker of financial markets.
Banks aren’t worried. If there’s a problem, they know you’ll bail them out again.
Source: LA Times