Several days ago we wrote about what we defined as the Fed's "D-Rate" - the interest rate at which the cash outflows from payments by the Fed on its Excess Reserves will surpass that cash inflows from its asset holdings, a very troubling day because as we further explained, from that point on the Fed would be "printing money just to print money." In other words, with every passing day, the Fed is getting ever closer to the point where the inflation it so very much wishes to unleash will force it to essentially request a technical bailout from Congress (and certainly will halt all future interest remittances to the Treasury), and the longer this takes, the lower the breakeven interest rate becomes, until one day it is so low the tiniest rise in rates will immediately put the Fed into the red. It now appears that Congress itself, the ultimate beneficiary of the Fed's free money policy as nearly half of all US spending is funded by the Fed's monetization of the deficit at ultra low rates, is finally catching on to what is the ultimate rock and hard place for Ben Bernanke. In a letter penned by the Chairman of the House Oversight & Government Reform Committee, Jim Jordan, says that he is "troubled by the corresponding effect that the Federal Reserve's expanding portfolio could have on current and future economic growth" and has asked the Fed what its "future plans to unwind the [$3 trillion and rising at $885 billion per month] portfolio" are.
What is surprising that Jordan actually gets it:
I am especially concerned that the historically low interest rates brought on by the Federal Reserve's monetary policy have hampered economic growth by distorting traditional financial incentives.
It gets better:
Younger Americans who have been working to save their income have faced meager returns in bank accounts and larger balance requirements, slowing their overall accumulation of wealth.' Likewise, older Americans living off of interest-bearing accounts have been forced to move to riskier investments to maintain their standards of living.
Most strikingly, by maintaining low interest rates, the Federal Reserve has distorted the real cost of the national debt, effectively "incentiviz[ing] the U.S. government to borrow and overspend."
Jordan is not happy:
The Committee has previously written to you with concerns about monetary policy in the United States. In July 2011, after a meeting between Committee staff and Federal Reserve staff, the Committee requested that you provide all Federal Reserve studies used to determine the value of Federal Reserve assets and "what the potential losses would be based on different unwind scenarios regarding the Federal Reserve's portfolio..." The Committee also requested that you provide "all estimates and analysis of the potential costs of payment of interest on reserves" that would incentivize banks to maintain excess reserves. In response, you provided only publicly released studies, and you did not provide any precise estimates of the future cost of reserve interest rate payments
As a result...
I respectfully request the following information for the period November 25, 2008 — present:
- All public and non-public studies, estimates, analysis, and evaluations of the value of the Federal Reserve's assets and any potential losses associated with future unwind scenarios commissioned or undertaken by any employee, agent, or contractor of the Federal Reserve;
- All public and non-public studies, estimates, analysis, and evaluations of the potential costs of payments of interest on reserves sufficient to prevent inflation associated with future unwind scenarios commissioned or undertaken by any employee, agent, or contractor of the Federal Reserve;
- All documents and communications between or among employees, contractors, or agents of the Federal Reserve System and employees of the Treasury Department or the Executive Office of the President referring or relating to the value of the Federal Reserve's assets and any potential losses associated with future unwind scenarios;
- All documents and communications between or among employees, contractors, or agents of the Federal Reserve System and employees of the Treasury Department or the Executive Office of the President referring or relating to the Federal Reserve's cost of payment of interest on reserves
Well, better late than never. However, we are confident that Jordan will be unhappy with the response whose advance preview we provide below:
Please accept this first completely blank napkin as evidence of all the rigorous analysis the Fed has conducted on all the issues you bring up. Also, on the second completely blank napkin we would have written the date on which we expect to begin unwinding the Fed's balance sheet.
Full letter below.