House Subcommittee on Economic Growth Demands Answers From Bernanke on Fed's Exit Strategy; Fed Must Reply by March 5

In a long overdue, yet surprising move, Jim Jordan, chairman of the House Subcommittee on Economic Growth demands answers on Bernanke's exit strategy.

Rep. Jim Jordan (R-Ohio) is demanding that Federal Reserve Chairman Ben Bernanke explain exactly how he plans to wind down the Fed's massive portfolio once its run of bond buying comes to an end.

In a letter sent to Bernanke on Wednesday, Jordan asked for any research the Fed has done on unwinding its burgeoning portfolio, which recently topped $3 trillion — three times its size in 2008, the lawmaker noted.

Minutes of the Fed's January meeting, released Wednesday, showed Fed officials were struggling with when exactly they should stop the bond buying. Several members of the Fed's policy-setting committee warned that the central bank may have to begin varying the amount of bond purchases in response to economic conditions, while some warned that the Fed might have to halt the purchases before the labor market is back to the desired strength.

Jordan asked Bernanke to provide all "public and non-public" research done on possible approaches to unwinding. The Fed must provide answers by March 5.

Full Text of Letter

Fox Business News has the Full Text of Letter to Ben Bernanke From Jim Jordan.

The letter is in image form. Here is a snip that I typed by hand.

Dear Chairman Bernanke:

...As the Federal Reserve System continues its bond-buying program into 2013, I am troubled by the corresponding effect that the Federal Reserve's expanding portfolio could have on current and future growth...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. Younger Americans who have been working to save their income have faced meager returns in bank accounts slowing their overall accumulation of wealth. Likewise, older Americans living off 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 incentivizing the U.S. government to borrow and overspend. ....

Inquiring minds may wish to read the entire letter.

I wholeheartedly applaud this effort by Jordan, and I also applaud the action date of March 5.

I especially endorse two ideas above

1. Fed policies have "distorted traditional financial incentives"
2. By maintaining low interest rates, the Federal reserve has distorted the real cost of the national debt, effectively incentivizing the U.S. government to borrow and overspend.

Fed policies have destroyed those on fixed income for the benefit of the banks and wealthy, as I wrote on Wednesday in Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else).

Inquiring minds may also wish to read Hello Ben Bernanke, Meet "Stephanie", my response to a reader on fixed income attempting to live on Social Security plus interest on a $16,000 CD.

Any clear-thinking person realizes the Fed has no exit strategy and thus will hold on to all or nearly-all of those assets for the full duration of their term. Thus, it will be interesting to see what lies Bernanke comes up with in response. 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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