WASHINGTON — The Federal Reserve has taken unprecedented steps to stimulate the economic recovery from the Great Recession, but the tab has risen to such tremendous proportions – fast approaching $4 trillion – that some worry the central bank ultimately could require its own taxpayer rescue.
The Fed’s total assets on its balance sheet have more than quadrupled to $3.8 trillion since 2008 amid a massive bond-buying effort. And there are few signs that the growth will stop any time soon.
That could put the finances of the world’s most powerful central bank at risk if historically low interest rates were to rise sharply – something top Fed officials said they do not expect but that critics warn is very possible.
It also could inhibit the ability of central bank officials to respond to future economic and financial crises.
“It’s really pretty cut-and-dried as far as the arithmetic goes: If you buy bonds and interest rates go up, you’re going to take a capital loss on those bonds,” said James D. Hamilton, an economics professor at the University of California-San Diego. “The more they buy, the bigger their balance sheet, the bigger the loss they’re going to face.”
Federal Reserve policymakers wrap up a two-day meeting Wednesday and are expected to continue purchasing $85 billion a month in low-interest-rate Treasury bonds and mortgage-backed securities as part of the Fed’s third and longest such program to stimulate economic growth.
The continuing lackluster recovery from the Great Recession, combined with the economic hit from the partial federal government shutdown this month, have analysts predicting that there’s little chance Fed policymakers will vote to scale back the program until early 2014 at the soonest.
If that’s the case, the Fed’s balance sheet would swell to more than $4 trillion. And as the number gets bigger, the risks also rise.