Fed focuses on bond buying risks

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Fed focuses on bond buying risks

Fed focuses on bond buying risks
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As US Federal Reserve policymakers hold their latest meeting, they are paying close attention to risks linked to the Fed’s bond buying.

Their stimulus programme includes 85 billion dollars of bond purchases each month in order to push money into the economy and drive down longer term borrowing costs.

The latest Fed meeting minutes showed that there is growing discomfort with the bond buying, which they have pledged to continue until US unempoyment figures fall, but analysts do not expect any change from this week’s meeting.

Among the worries are the possibility of losses on the huge amount of bonds the Fed has bought. Losses could touch off a political fire storm and harm the central bank’s independence.

Politicians watching

A Fed loss, while not meaningful in an economic sense, could pose a serious political liability that might expose the central bank to unwelcome scrutiny from US lawmakers, some of whom have been heated critics of the bond buying.

“While this is of little macroeconomic significance, it will not go unnoticed,” Charles Plosser, president of the Philadelphia Fed and a noted policy hawk, said in November.

“It is a risk to perceptions about the institution, which eventually may put the Fed’s independence at risk.”

Other officials have also voiced a keen awareness of the potential costs of the asset purchase programme. Fed Chairman Ben Bernanke recently went out of his way to stress that these costs, while hard to gauge, would not be ignored.

“We have found this to be an effective tool, but we are going to continue to assess how effective because it is possible that, as you move through time and a situation changes, that the impact of these tools could vary,” he said on January 14. “When something is more costly, you do a little bit less of it.”

The central bank regularly returns profits from its bond holdings to the US Treasury and it has never missed a payment. Last year, remittances hit a record $89 billion thanks to income from assets on its balance sheet, which have more than tripled to almost $3 trillion since the financial crisis struck in 2007.