By Joshua Zumbrun
The Federal Reserve pushed its balance sheet beyond $3 trillion for the first time this week while undertaking open-ended purchases of Treasuries and mortgage-backed securities to combat 7.8 percent unemployment.
The Fed’s total assets climbed by $48 billion in the past week to $3.01 trillion as of Jan. 23, according to a release from the central bank today in Washington. Holdings of Treasuries climbed by $7.8 billion while mortgage-backed securities in the Fed portfolio rose by $35.6 billion.
The bond buying is part of Chairman Ben S. Bernanke’s campaign to use the full force of the central bank’s balance sheet to stoke the economic recovery. The Fed began purchasing $40 billion of mortgage-backed securities a month in September and this month added $45 billion in Treasury securities to that pace, bringing total monthly purchases to $85 billion.
“You’re hard-pressed to find another example in history where the Fed pulled out all the stops to help a recovery along,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York, and a former Fed economist. “It’s at least as revolutionary as Paul Volcker coming in and saying we’re going to hike rates until inflation” declines.
The Fed has a dual mandate from Congress to achieve stable prices and maximum employment. Volcker, Fed chairman from 1979 to 1987, pushed interest rates to as high as 22 percent to rein in annual price acceleration approaching 15 percent. Now Bernanke is focusing Fed policy on the other mandate, aiming to reduce the ranks of the nation’s 12.2 million unemployed workers.
Fed officials have said their $85 billion pace of purchases will continue until the labor market improves “substantially.” Still, they disagree on how long they should press on with the buying.
The minutes from their Dec. 11-12 meeting Federal Open Market Committee participants “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date. A number of policy makers are concerned the size of the Fed’s holdings “could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation,” according to the minutes.
The central bank’s balance sheet has provided record windfalls to the U.S. Treasury. The Fed uses interest income from its bond holdings to cover its own expenses and sends the rest to the Treasury. In 2012, that dividend to taxpayers was $88.9 billion.
One risk from a large balance sheet is the possibility that the Fed’s interest income could evaporate in coming years as rates rise, according to a paper released last week written by researchers in the Fed’s monetary affairs division. The paper studied different scenarios and concluded that the central bank’s payments to Treasury “will likely decline for a time, and in some cases fall to zero.”
The Standard & Poor’s 500 Index, the benchmark for U.S. equities, was little changed today at 1,494.82 at 4 p.m. in New York, while the yield on the 10-year Treasury note increased 0.03 percentage point, to 1.85 percent. The yield has increased from 1.72 percent on Sept. 13, the day the Fed announced its third round of quantitative easing, while stocks have climbed 4.8 percent.
The central bank’s balance sheet is now more than triple its size before the financial crisis. Fed assets stood at $924 billion on Sept. 10, 2008, the week before the bankruptcy of Lehman Brothers Holdings Inc. helped spark a global financial crisis.
The Fed responded to the financial crisis first with emergency credit programs, and then with bond purchases known as QE or quantitative easing. In the first round of purchases, the Fed bought $1.7 trillion of securities. In a second round of QE, begun in November 2010, the central bank added an additional $600 billion of Treasuries to its holdings.