Fed’s balance sheet soars to $3.0 trillion after recent bond buying

FXstreet.com (Barcelona) - Federal Reserve Chairman Ben Bernanke’s unprecedented bond buying provided the impetus to push the Fed’s balance sheet to a staggering record of USD $3.0 trillion, even as he shows no sign of softening his effort to relinquish the 7.8% unemployment.

Indeed, the Fed is slated to purchase $85.0 billion of securities every month, using the full extent of its balance sheet to stimulate the economic recovery. Back in September, the central bank began $40.0 billion in monthly purchases of mortgage-backed securities and refused to allay this trend by supplementing an additional $45.0 billion in Treasury Securities to that pace this month.

“We’re in uncharted territory,” noted Julia Coronado, the chief economist for North America at BNP Paribas SA in New York, and a former Fed economist as well. Even as “the easy money will flow through financial markets and into the real economy at some point and lift us to a better growth trajectory,” the U.S. faces “a lot of risks.” she added.

Quantifying this trend, the Fed’s total assets climbed by $48.0 billion in the past week to $3.01 trillion as of January 23, according to a recent release from the central bank yesterday in Washington. Perhaps not surprisingly, the announcement subsequently came as the Standard & Poor’s 500 Index closed at the highest level since December 2007.

Fed policy makers have long voiced an increasing concern that record-low interest are overheating the markets for assets from farmland to junk bonds, which could certainly augment risks when they eventually reverse their unprecedented bond purchases.

However, with unemployment still high almost three-and-a-half years since the genesis of the economic recovery, Fed officials are expected to affirm their accommodation when they meet in Washington to discuss policy on January 29-30. “You’re hard pressed to find another example in history where the Fed pulled out all the stops to help a recovery along.” commented Michael Hanson, senior U.S. economist at Bank of America Corp.

As such, the Fed does indeed possess 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% to rein in annual price acceleration approaching 15%. Presently, but by no means less dire, Bernanke is focusing Fed policy on the other mandate, aiming to reduce the ranks of the country’s 12.2 million unemployed workers. Fed officials have repeatedly said their $85.0 billion pace of purchases will continue until the labor market improves “substantially.” However, they disagree on how long they should press on with the buying.

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