January 23 marked a historic event for the Federal Reserve,
the monetary institution which has seen its share of historic
events since the onset of the financial crisis in 2007.
However, as of the week ended January 23, the Fed's balance
sheet grew to $3 trillion for the first time ever, the largest in
the Fed's nearly 100 year history.
The Fed began purchasing $85 billion per month earlier in
January as part of its expanded third round of quantitative
easing. Initially, the Fed had planned to purchase $45 billion
per month in mortgage backed securities.
However, with the expiration of the second Operation Twist in
December, the Fed rolled the purchases of treasury bonds into QE3
and began purchasing a total of $85 billion per month in
securities this month.
As of January 23, the Fed's balance sheet climbed by $48
billion to $3.01 trillion, according to a release from the
central bank Thursday from its Washington headquarters. The
announcement coincided with the S&P 500 closing at its
highest level since December 2007 as the index nears the
psychological 1500 level.
The recent moves by the Fed are being called the most
revolutionary policy measures taken by the central bank since its
inception, potentially second only to Paul Volcker in the 1970's.
Volcker, the Fed Chairman from 1979 to 1987, raised interest
rates as high as 22 percent during his tenure to end the
stagflation that plagued the era and cool inflation.
Under Bernanke, the Fed has embarked upon three rounds of
quantitative easing, two rounds of operation twist, rate cuts,
currency swap lines, and an alphabet soup of repurchase
facilities aimed at stabilizing the financial system in 2008.
Under Bernanke, the Fed has had to focus less on inflation and
more on deflation. The Fed's dual mandate, full employment and
stable inflation, has led the Fed to adopt an informal inflation
target of 2.5 percent PCE inflation and 6.5 percent
With inflation trending below the target and unemployment
stuck around 8 percent for months, the Fed has kept easing policy
to achieve these targets.
The future of the Fed policy decisions remains shrouded in
some mystery. The new FOMC members, the policy-setting committee
of the Fed, took seats this month and the committee has a
slightly more dovish tilt than in previous years.
Also, Chairman Bernanke, the architect of many of these
crisis-fighting policies, is set to retire from his role as
Chairman at the end of 2013 and no successor has been named as of
yet. Leading candidates include current Fed Vice-Chairman Janet
Yellen and former Treasury Secretary and Current Harvard
University President Larry Summers.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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