Over the past couple of years, the Fed’s aggressive monetary policy has led to a widely expanded balance sheet. With roughly $4.5trillion worth of assets on its books – predominantly treasuries and mortgage-backed securities – the Fed might appear far more exposed to risk than it might permit for US companies. At Janet Yellen’s recent Senate testimony, South Carolina Republican Sen. Tim Scott remarked, ” But it appears that nobody is stress-testing the Fed. The Proverbial Fox is guarding the hen house from my perspective.”
Yellen responded by saying that the Fed does in fact conduct stress tests on itself. However, as many of the graphs in the linked article demonstrate, the Fed appears to have far more risk than the banks it regulates. Yellen explained that the Fed’s powers and function give it more flexibility with its balance sheet. Yellen certainly has a point, yet this is the first time an experiment like this has been run. I really wonder what a net release of some assets would like. Of course, that is years or decades away, but it by no means seems like something that will go over smoothly.