Could Fed require its own bailout?

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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 today 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.

"The Fed stands to lose a lot of money, and by a lot of money, I mean hundreds of billions of dollars," said Rep. Mick Mulvaney, R-S.C., who has raised those concerns with Fed chairman Ben S. Bernanke. "It is not hyperbole to suggest the next big bailout could be of the Federal Reserve."

But Mr. Bernanke said there's no need to worry and that any losses incurred by the Fed probably would be offset by more than $300 billion in interest the Fed has earned on its expanded holdings in recent years.

"The bottom line is that for any reasonable interest rate path, this is going to end up being a profitable policy for the taxpayer," Mr. Bernanke told lawmakers this summer.



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