[THE] TIME is approaching to scale back the bond-buying spree and get ready to unwind some of the Fed's massive portfolio [of mortgage bonds and U.S. Treasuries], which now tops $3 trillion. The longer the policy lasts . . .
The Federal Reserve's purchases have driven interest rates to near zero. This has stimulated the economy, but not without cost. Savers, particularly older ones trying to live on income from their investments, are starved for safe options. They've been forced into stocks, which is one reason the market has been acting as if it's on steriods. Further, with borrowing costs low, Congress and the White House have less incentive to rein in the national debt. Rock-bottom interest rates have also distorted markets.
. . . . On Monday, billionaire superinvestor . . . Warren Buffett told CNBC that markets are on a "hair trigger" waiting for signs of change from the Fed. The market is "hooked on the drug" of easy money, Dallas Fed President Richard Fisher told Reuters.
Fisher's comparison . . . is apt. Markets might not like the idea of the drug being withdrawn [read the drug's being withdrawn] now, when the Fed holds a portfolio of $3 trillion. But the withdrawal symptoms will be a lot worse once the portfolio grows to $4 trillion, or more.
No one has a clear idea how the Fed plans to unload such staggering sums. As it sells off its hoard, the value of all bonds could plunge, more than wiping out the small returns bond investors are getting. But holding onto the bonds as the economy stabilizes would set off inflation, which the Fed is required to combat.
That's a good reason to start thinking about the endgame sooner rather than later. The longer the Fed's easy-money policies go on, the greater the risk they will distort markets, create new bubbles and set the economy up for another fall.
(Editorial, "Dow Jones high on Fed steroids," usatoday.com, March 4, 2013 (emphasis added))
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