Lawmakers are warning that the central bank’s vast purchases of government debt are feeding financial bubbles.
Shortly after the pandemic struck last year, the Federal Reserve began buying billions of dollars in government debt every month to drive down borrowing costs and keep the economy from collapsing.
Today, house prices are surging, stocks have continued their stratospheric rise, and banks have more cash than they know what to do with. Yet the Fed is still pumping billions into the economy. Why?
That’s what a growing number of lawmakers, investors and even some Fed officials themselves are demanding to know. They are warning that the central bank’s vast purchases of government bonds and mortgage-backed securities are feeding financial bubbles in the housing, stock and even cryptocurrency markets, and stoking higher consumer prices, with little apparent benefit to ordinary Americans.
“There’s no justification for the Fed to maintain [its purchases] at current levels, and doing so seriously risks contributing to heightened inflation,” Sen. Pat Toomey (Pa.), the top Republican on the Banking Committee, told POLITICO.
Fed policymakers, who will gather this week for a closely watched meeting on their next steps, are now grappling with how and when to start slowing their bond buys, which amount to a staggering $120 billion a month. The question has touched off a heated debate within the central bank itself over the future of a program that rescued the financial markets from a near meltdown last year.
Some Fed officials believe that tapering bond purchases too soon could weaken the economy once the trillions of dollars in aid approved separately by Congress runs out, particularly amid rising fears about the latest coronavirus surge. Winding down asset purchases is the first step toward a more significant event — raising short-term interest rates — and the Fed wants to ensure that its actions won’t slow the job market recovery as millions of Americans remain out of work.
But it’s also not clear how much those asset purchases are actually helping support jobs. Publicly traded companies, which have greatly benefited from the Fed cash machine, have engaged in a wave of stock buybacks, which boost their share prices and enrich investors but do little to directly expand employment.
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House prices are surging, stocks have continued their stratospheric rise, and banks have more cash than they know what to do with. Yet the Fed is still pumping billions into the economy. Why?https://t.co/1Hvj1hjPq2
— POLITICO (@politico) July 26, 2021
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