House of the rising Fed

The Federal Reserve, much like Atlas the Titan in Hesiod’s Theogony, is trapped

Since the U.S. Federal Reserve (“Fed”) first announced and implemented its quantitative easing (“QE”) programme in March 2009, economists and pundits alike have hotly debated its effects on financial markets. Specifically, the conversation has focused on the Fed’s ability to control the monetary supply, inflation, and interest rates.

Before the global financial crisis (“GFC”), the Fed was, rightfully so, a substantial buyer of U.S. Treasury securities. Purchasing these financial assets helped monetise the national debt, prevent fiscal cliffs, and ensure the government always met its obligations. In fact, the U.S. Government’s ability to create money through the Fed, alongside that currency’s global reserve status, is a determining factor in the Federal Government’s favourable AAA credit rating—if Uncle Sam can’t pay you from his tax revenues, he can always borrow the money to do so from the Fed.

The Fed’s balance sheet was relatively tiny back in the good old money-actually-earns-intere…