The Federal Reserve is a Profit Making Center for U.S. Treasury
Tuesday, January 10, 2012
The Federal Reserve has bent over backwords in order to meet its twin mandate of
low inflation and maximum employment. Since the mortgage meltdown of 2008,
the Fed has expanded its balance sheet to a staggering $2.92 trillion dollars. By
purchasing U.S. Treasuries and mortgage securities, the Fed has driven interest
rates to historic lows. Nonetheless housing remains in a quagmire, with
over 25% of all existing home owners underwater, and home prices are still not expected
to bottom till sometime this year (calling housing market bottoms has been fraught
with error, and with a huge shadow inventory of unsold homes, could continue their
downtrend into 2013). Meanwhile, while unemployment has been coming down,
it remains high at 8.5%.
Question 1. Has the Fed achieved maximum employment?
Answer. No. Unemployment at 8.5% and a still falling housing market
does not equate with meeting the Fed's first mandate.
According to the Bureau of Labor Statistics, inflation as measured by the consumer
price index increased 3.4% over the last 12 months.
Question 2. Is inflation low?
Answer. No. It is arguable that inflation is not exactly low at
3.4%, but not exactly high either.
While the Fed has yet to achieve its twin mandate, what it has clearly achieved
is staggering profits from its enormous balance sheet. While the average hedge
fund lost 10% in 2011, and stock investors pulled money out of stock funds virtually
every week in 2011 for a sum total of $148 billion for all of 2011, the
Fed managed to book $79.3 billion in profit. Not bad
for a bunch of public servants. These funds will be handed over to the U.S.
Treasury to cover the near $1 trillion deficit in 2011. A drop in the
bucket to be sure, but for the many investors in the U.S., both retail
and institutional, it must no doubt seem unfair that the Fed can make turning a
profit in the market look so easy.
It must be nice when your funding cost is 0%, and your buying ability is unlimited.
The Fed's jaw-dropping activities should remind all investors that we hardly operate
in a free-market economy, but a centrally-planned market where a small group of
unelected central bankers can make the capital markets a farce.
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