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If the December Fed rate hike of 0.25% marks the beginning of a period of tightening, the U.S. taxpayer is about to get a very unwelcome surprise.
Now that the U.S. Federal Reserve is raising interest rates, it won't be so easy to hide the dire consequences of years of loose money policies – especially all the quantitative easing (QE).
"They've boxed themselves in and taken America on a white knuckle ride they didn't sign up for," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
You see, when the financial crisis of 2008 struck, the Fed first lowered interest rates until it got to zero, where they remained until today.
But because the U.S. economy was still sputtering despite zero interest rates, the Fed then launched QE – the mass purchasing of U.S. Treasury bonds (essentially U.S. government debt) and the toxic mortgage-backed securities that helped trigger the 2008 crisis.
The purchases added $4.5 trillion to the Fed's balance sheet, including $1.7 trillion of mortgage-backed securities.
While these assets helped the Fed keep rates low, in an era of Fed interest rate hikes, the bloated balance creates issues the agency has never before faced.
For one thing, it won't be easy to "normalize" the balance sheet back to below $1 trillion (about where it was before the 2008 crisis). To sell those assets, the Fed will need buyers.
"There's a reason the Fed is the buyer of last resort. Nobody wants this stuff," said Fitz-Gerald. He noted that the American taxpayer ultimately funded the QE purchases and will suffer the most when the Fed encounters problems unwinding those assets.
Fitz-Gerald said the big banks used the Fed and its QE program to socialize the risks they took in creating the 2008 crisis.
"They gain, but the public pays," Fitz-Gerald said. "And now the American people own a $4 trillion toxic balance sheet."
Another big problem with a Fed rate hike now is basic to bond investing: Bond prices fall when interest rates rise.
Here's what that will do to the Fed's balance sheet…
About the Author
Dave has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.