The Federal Reserve’s balance sheet now tops $3 trillion, a new record. The Fed has increased its purchases of Treasuries and mortgage-backed securities as part of its so-called quantitative easing strategy to revitalize the economy.
“Three trillion is not a lot of money today… because the financial markets are so big,” says Chris Whalen, executive VP at Carrington Investment Services. (The face value of the global derivatives market alone is estimated at $1.2 quadrillion, equivalent to $1,200 trillion.)
But Whalen is not a fan of the Fed. FOMC policymakers “are making it up as they go,” he says, adding that they're acting more like the Marx Brothers with their ad-lib antics rather than serious regulators.
“The Fed and the Treasury are the biggest source of systemic risks today…. creating another bubble potentially in housing and perhaps also in equities," Whalen notes.
He wants the Fed “to explain a little better just why they’re doing what they’re doing.” Under the law, the Fed’s mandate is to promote maximum employment and stable prices. Whalen says the Fed’s priority now seems to be maintaining Treasury access to the debt markets as part of its monetary easing policy.
Whalen argues that Fed policy is having only a marginal effect on the economy because “you can only do so much with monetary policy.”
Stocks have been rising as a result of the Fed's market liquidity. But can the market sustain its upward trajectory after the Fed ends its quantitative easing program? Some Fed officials like Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser are already calling for the Fed to change its policies.
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