A study conducted by investment analysts at New York City’s MSCIInc. suggests that Mr. Bernanke’s efforts to keep the flounderingeconomy in tact on the heels of a recession have proven to befutile and will continue to collapse.
According to Bloomberg News, who contracted MSCI to conduct the study, thepotential losses the Fed could see during the next three years are“unprecedented.” MSCI says the market values of Fed holdingsare likely to shrink by $547 billion during that span.
The group says they concluded as much after using stress-testscenarios designed by the central bank to examine how the value ofsecurities held in the Fed’s portfolio at the end of 2012 willstand up during the next few years. In a situation involvingeconomic contraction and rising inflation, MSCI expects the Fed’sholdings to drop drastically by more than half of a trilliondollars.
Should conditions improve, however, losses may not amount tothat substantial of a figure. If the economy performs “in linewith consensus forecasts of gradually rising growth, inflation andinterest rates,” reports Bloomberg, the mark-to-market lossduring the next few years could amount to ‘only’ $216 billion.Sarah Binder, a senior fellow at the Brookings Institution, tellsBloomberg that either way she expects a hostile response fromWashington.
“Even if there’s a perfectly logical explanation and thenormalization of the balance sheet is a good thing in the longterm, the headlines will probably generate congressionalscrutiny,” she says. “That’s never a good thing from theFed’s perspective.”
So far, though, the central bank has stayed optimistic. Speakingin Washington on Tuesday, Bernanke told the Senate BankingCommittee that the Fed “remains confident that it has the toolsnecessary to tighten monetary policy when the time comes to doso.” At least one lawmaker, though — Sen. Bob Corker(R-Tennessee) — is skeptical. Hours after Bernanke’s address, hesent a letter to the chairman asking, “Do we have a seriouspolicy problem brewing here, or is this simply an optics problemabout which we should not be concerned?”
Others have reacted positively to Bernanke’s remarks and havesaid his confidence could be a good think. His comments did notaffect the price of oil on Wednesday morning, and the SucdenFinancial Research said that the chairman’s statement may have hadsomething to do with keeping the cost of crude from rising.
"It seems that the optimistic comments from Bernankeovershadowed the political uncertainty of the Eurozone and raisedhopes about a possible rebound in the oil demand for the rest of2013,” the report reads.
Whether Bernanke’s predictions prove to be correct is anotherstory, though. According to the MSCI report, the chairman’spolicies are on track to cause the Fed to lose a substantial lossin a short amount of time. Bernanke says his policy of “crediteasing,” or buying back debt from the Treasury and federal housingagencies, as well as mortgage-backed securities, is key toimproving the economy. As interest rates ride, however, returnsfrom the Fed’s holdings are sharply shrinking.
“The political backlash could be particularly acute giventhat a good portion of the funds that would otherwise be remittedto the Treasury would be transferred to large financialinstitutions in the form of interest paid on reserves,”Laurence Meyer, a former Fed governor and co-founder ofMacroeconomic Advisers LLC in St. Louis, adds to Bloomberg.“This could present a significant communication challenge forthe Fed and adversely impact its reputation.”
Bernanke’s second four-year term as Federal Reserve chairmanexpires next year and he has not announced his plans for thefuture. Speaking to the Senate, however, Bernanke did say that hethinks the Fed should continue with its current policies,regardless of how some economists think it will work.
“To this point we do not seethe potential costs of the increased risk-taking in some financialmarkets as outweighing the benefits of promoting a strongereconomic recovery and more rapid job creation,” Bernankesaid.
Should the “unprecedented losses” predicted by MSCI occur,though, the bank might start to see those risks. The New York Timesreports that losses in the hundreds of billions could mean the Fedwould be unable to move profits to the US Treasury Department forthe first time since the 1930s.
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