Federal Reserve loses $155 billion in paper value, Greenspan calls for stimulus tapering

Surprisingly, the Federal Reserve has captured headlines in the United States, even with the NSA leaks and the IRS targeting scandal. The three major points of Fed news: paper value loss, former Fed Chairman Alan Greenspan’s suggestion of slowly tapering off the stimulus and a poll finding Fed Vice Chair Janet Yellen as the most likely candidate to succeed Chairman Ben Bernanke.

Paper Value Loss

It was reported that in the month of May, the Fed lost $155 billion in paper value out of its massive $3.2 trillion portfolio of assets. About $55 billion in capital resources would have been gone by three times, but Forbes notes that it didn’t happen because the Fed did not have to mark its portfolio or sell its enormous $3.2 trillion.

Financial experts say that the recent paper loss isn’t damaging because the Fed doesn’t have to mark its portfolio or even identify the value’s erosion. Furthermore, the central bank has not sold any of its Treasury paper, government securities and U.S. Treasuries because of quantitative easing being the official policy of the Fed. This means, an additional $45 billion in Treasuries will be added to the books this month.

There is a possible loss of roughly $3 billion for each 100th of a percentage point jump in yield but its technical relationships and methods with the Treasury prevent the Fed from ever recognizing this loss.

Alan Greenspam

Former Fed Chairman Alan Greenspan stated in an interview with CNBC on Friday that the Fed needs to begin cutting back on its aggressive stimulus program and start to reduce its expanding balance sheet, which is projected to hit $4 trillion by the end of the year.

Greenspan recommended to taper off the Fed’s monthly purchases of $85 billion in bonds because it would be unclear as to how the financial markets would react, which is the primary reason, Greenspan said, for the central bank to start withdrawing from these acquisitions.

“My view is the sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve, which everyone agrees is excessive, the better,” said Greenspan, who chaired the Fed from 1987 to 2006. “If we do move too rapidly with respect to the Fed action it will really shock the market. I think gradual is adequate, but we’ve got to get moving.”

His comments come as Bernanke stated last month at a Congressional hearing that the Fed could begin to scale back its monetary policy if the data suggests that it should be done – he did say, however, that QE could be expanded if the markets called for it.

Greenspan’s retort to this sentiment was that it doesn’t matter if the economy is ready for the Fed to stop stimulating or not, but rather “I think we’ve got to do it even if we don’t think it is strong enough.”

Economists go with Janet Yellen

According to a poll of economists by Reuters, most concur that the next head of the Fed will be Yellen in 2014. The results showed that 40 out of 44 said the White House would tap Yellen, but only 23 out of 38 economists support her promotion.

“If President Obama nominates Janet Yellen, it would be a feather in his cap, as the first president to nominate a female Fed chairman,” said Ellen Zentner, an economist at Nomura, in a statement to the news outlet.

Of the top-level Fed officials, Yellen stands out as one of the most ardent supporters of holding down interest rates through the means of monetary easing.

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