MARK TO MARKET: The Fed’s $4.5 Trillion Dilemma

A Republican, Powell is considered a middle-ground choice for President Trump. In 2012, he was nominated to the Fed Board of Governors and voting member of the policy committee by President Obama. Consensus among market experts is that Powell will maintain the Fed’s current strategy of gradual hikes to the benchmark fed funds rate, upon which short-term debt is often based. He openly supported the Fed’s prior two rate hikes this year and should continue his advocacy for a third, presumably in December, and three each in 2018 and 2019. Powell was an ally on the Yellen-led decision to reduce the Fed’s massive $4.5 trillion in government debt and securities bought in response to the 2007-2009 recession. The reduction will be gradual and in scheduled increments, allowing the effects to be absorbed with minimal impact. However, the reduction of these Fed assets will inevitably increase the cost of long-term debt, impacting consumers and businesses on mortgages, bank loans and long-term financing of equipment.

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