Andrew Levin on the Costs and Benefits of QE4 and the Future of the Fed’s Balance Sheet
Macro Musings with David Beckworth
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The Fed's Balance Sheet Looks Like a Hedge Fund
In effect, the Federal Reserve's balance sheet now looks similar to that of a hedge fund whose long term assets are fine and spice or term liabilities. But such funds routinely hedge their interest rate risk. Whereas the Federal Reserve has not bought any options or derivatives to hedge its risk. And that leads us to the next finding. If you're heavily weighted to the long end, duration is an issue. So talk us through that. What should we be looking for when it comes to interest rate risk? Okay, since you did it, I'm going to do it myself,. which is to quote a sentence from the introduction of our paper. In effect, the Fed's portfolio is effectively naked.
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