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WASHINGTON: Federal Res-erve Chairman Ben Bernanke’s unprecedented bond buying pushed the Fed’s balance sheet to a record $3 trillion as he shows no sign of softening his effort to bring down 7.8 percent unemployment.
The Fed is purchasing $85bn of securities every month, using the full force of its balance sheet to stoke the economic recovery. The central bank began $40bn in monthly purchases of mortgage-backed securities in September and added $45bn in Treasury securities to that pace this month.
“We’re in uncharted territory,” said Julia Coronado, chief economist for North America at BNP Paribas SA in New York, and a former Fed economist. 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 United States faces “a lot of risks”, she said.
The Fed’s total assets climbed by $48bn in the past week to $3.01 trillion as of January 23, according to a release from the central bank in Washington. Fed policy makers have voiced increasing concern that record-low interest rates are overheating markets for assets from farmland to junk bonds, which could heighten risks when they reverse their unprecedented bond purchases.
Yet with unemployment still high almost three-and-a-half years since the economy began its recovery, Fed officials are expected to affirm their accommodation when they meet in Washington to discuss policy next Tuesday and Wednesday.
“You’re hard pressed to find another example in history where the Fed pulled out all the stops to help a recovery along,” said Michael Hanson, senior US economist at Bank of America in New York, and a former Fed economist. “It’s at least as revolutionary as Paul Volcker coming in and saying we’re going to hike rates until inflation” declines.