Does the Federal Reserve Board’s Record $4 Trillion plus Holdings Pose Inflationary Threat?

December 12th, 2013 | by Morris Beschloss | Comments

When Janet Yellen, outgoing Federal Reserve Board Vice Chairman, takes on the heavy chairman’s task from embattled current Fed boss Ben Bernanke, she will face a mountain of Treasury bonds and mortgage-backed derivatives, that have quadrupled over her predecessor’s eight year term.

This expansion from $1 trillion of U.S. Treasury paper, bought periodically at the multi-weekly “debt auctions,” has swollen to over $4 trillion and is being added to at the monthly rate of $85 billion worth of government bonds and bank-held mortgage debenture derivatives. This fourth segment of quantitative easing since the financial trauma of the great recession has as its prime objective keeping the bond price up and their yield low. This is especially true of the 10-year note, on which mortgages and many other commercial interest rates pivot.

But unlike the mainstay task of controlling inflation, which has been the Federal Reserve Board’s previous focus, the Bernanke leadership has taken upon itself the economic role of reversing the current incubus of unemployment. The Fed is hoping to stimulate hiring, with the easier availability of money supply that the ongoing Fed action portends.

While disinflation has ruled the monetary roost since the outbreak of the “financial great recession,” the Fed has perceived no inflationary danger in constantly generating additional money supply into the nation’s economic mainstream. Predictions of tapering its maximum bond and mortgage derivative buying have been unfounded, as the Bernanke Board sees the U.S. economy’s annual gross domestic product of goods and services hanging in at the annualized rate of 2.5%, and unemployment displaying only minor signs of improvement.

As vice-chairman Janet Yellen takes on the Fed leadership role, one can expect a continuation of Bernanke’s “dovish” approach. This means that a downturn, “tapering,” of maximum Fed buying could be postponed till late into spring 2014, barring an unexpected pickup in overall employment; or an eventual realization that “easy money” is not the cure for the ongoing unemployment problem.

With the universal implementation of “Affordable Healthcare” wreaking still unknown havoc as yet, this may eventually impose an additional complicating factor early into the Yellen Fed’s” future activities.

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