Fed’s QE2 presses print red ink
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
If Ben Bernanke were an investor, he’d be bummed out. The first chunk of the Federal Reserve’s $600 billion Treasury bond purchase program is in the red thanks to rising yields. The central bank’s cheap financing makes outright losses unlikely, but Mr. Bernanke, the Fed chairman, could still face an image problem.
To the extent the Fed’s second round of so-called quantitative easing, colloquially known as QE2, was designed to keep a lid on interest rates, it has backfired. Since the program was unveiled in early November, five-year yields have marched more than 0.9 percentage points higher, eradicating the initial yield slump seen after the Fed first hinted a few months earlier that another round of easing was on the cards.
When bond yields rise, prices fall. As a result, the Fed’s first $116 billion of QE2 purchases were worth approximately $113 billion at the end of active trading on Tuesday, a paper loss of nearly 3 percent.
Of course, the Fed won’t be selling these securities anytime soon. The U.S. economy and employment situation will have to improve noticeably before that happens. But a continuation of the recent rise in yields would bring much lower valuations by then.
Even so, the Fed may not actually lose any money overall, thanks to its low cost of funds and the interest payments rolling in on its holdings. In fact, the Fed’s supersized balance sheet — now at $2.4 trillion — is a bit of a cash cow for the Treasury. In 2009, when it was smaller, the Fed plumped the government’s coffers by $47.4 billion.
Yet the slide in governments gives detractors ammunition for questioning the Fed’s judgment. The extraordinary QE2 policy was supposed to stimulate the economy by keeping interest rates low. So far, the opposite has happened. Moreover, the tax-related deal in Congress — if passed — arguably reduces the need for it. When Mr. Bernanke next has to convince lawmakers that QE2 was a good idea, the red ink could work against him.