Tags: Jubak | Fed | QE | assets

MSN Money's Jubak: Fed Has 'No End Game' for Unwinding its Balance Sheet

Wednesday, 06 Nov 2013 08:15 AM

By John Morgan

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Investors are focused on when the Federal Reserve will start to taper its massive asset purchases, but it appears to have "no end game" for the bigger problem of unwinding the immense $4 trillion balance sheet it has accumulated, according to MSN Money columnist Jim Jubak.

Tapering its monthly $85 billion in government bond purchases to a lesser amount, like $70 billion, pales in importance to the question of how it will sell the trillions in Treasurys and mortgage-backed securities that it already holds from quantitative easing (QE), said Jubak, a fund manager.

"The startling answer that's starting to emerge from studies by the Fed's own economists is that selling these assets isn't an option," he wrote in his MSN Money column.

Editor’s Note:
Weird Trick Adds $1,000 to Your Social Security Checks

"There is no quick exit strategy for the Fed, these studies argue. The Fed — and the U.S. economy — will be stuck with its current nearly $4 trillion balance sheet for a decade or more."

The Fed owns so much of some government debt classes, Jubak noted, that "it has become the market for those assets. Any significant effort to sell those assets would send prices down and yields up, producing big losses for the Fed."

Jubak predicted the Fed might end up having to hold those assets until they mature, for seven years or more.

And if the Fed does hold to maturity, the mountain of debt means it would have less available firepower to bring to bear in the next financial crisis, and interest rate volatility will increase, he explained.

Charles Biderman, chairman and founder of TrimTabs Research, told CNBC that the Fed is boxed in a corner.

"Most people don't seem to get that QE is a zero-sum game," Biderman said.

He noted stock prices are going up and said three of the six biggest monthly equity inflows into stocks, stock mutual funds and stock exchange-traded funds in history have occurred in 2013, thanks to Fed policy that is chasing money into stocks.

But at the same time, bond funds returns and assets are going down, again thanks to Fed policy that has held interest rates down and forced investors' money out of bonds and into stocks.

Biderman said talk of whether the recent government shutdown hurt the United States is just a distraction.

"This is a cover for the fact that the U.S. economy is weaker this year than last year," he told CNBC. Nominal wage and salary growth is at a low point, according to Biderman's research.

"Why are we a slower economy? Because of higher taxes that occurred at the beginning of the year — higher withholding and income taxes," he asserted.

Editor’s Note: Weird Trick Adds $1,000 to Your Social Security Checks

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