Fed's Portfolio Tops $4 Trillion for First Time

Milestone Comes Amid Questions About Bond-Buying Programs

By VICTORIA MCGRANE
Dec. 19, 2013 4:33 p.m. ET

The Federal Reserve said Thursday that its holdings of bonds and other assets topped $4 trillion for the first time, a milestone underscoring the benefits and risks of the central bank's bond-buying programs.

The Fed's portfolio—including Treasurys, mortgage-backed securities, loans, coins, buildings and other assets—totaled slightly more than $4 trillion as of Dec. 18, up from less than $900 billion before the crisis.

It's going to keep growing for a while. A major propellant of this increase has been the Fed's three rounds of bond-buying programs since the 2008 financial crisis. The current program is aimed at holding down long-term interest rates to encourage more spending, investing and hiring. The Fed said Wednesday that it plans to keep going next year, though at a slowing pace.

Fed officials disagree about the economic benefits of the program. Fed Chairman Ben Bernanke said at a news conference Wednesday, "I'm pretty comfortable with the idea that this program did, in fact, create jobs."

Other officials are skeptical of that claim and worry more that the bond purchases—by pumping new money into the financial system each month--could fuel an outbreak of inflation or dangerous asset bubbles. Dallas Fed President Richard Fisher said earlier this month the program, "comes at a cost that far exceeds its purported benefits."

Citing signs the recovery is strengthening, the Fed said Wednesday that it will trim its monthly bond purchases to $75 billion in January from $85 billion currently. If the economy and labor market keep improving as the Fed expects, it will reduce the amount in increments of about $10 billion at future meetings, Mr. Bernanke said at a press conference after the announcement.

Following that path, the Fed would end up with a portfolio of assets worth about $4.5 trillion by the time the bond program is finished late next year. That would be about a quarter the size of the roughly $17 trillion in annual U.S. economic output.

The finally tally could be bigger or smaller, depending on how the economy performs in the months ahead as well as on how Fed officials decide to handle the details.

"If the economy slows for some reason or we are disappointed in the outcomes, we could skip a meeting or two," and leave the program unchanged, Mr. Bernanke said Wednesday. Or, he added, "if things really pick up, then of course we could go a bit faster."

If the Fed reduced the bond buys by $10 billion per month at each of its eight meetings this year, it would add about $450 billion in assets to the balance sheet next year.

"We're still going to be buying assets at a high rate and…increasing our balance sheet and holding on to those assets," Mr. Bernanke said.

The Fed would have bought about $1.6 trillion in bonds in the current program, under the scenario he described, said Laura Rosner, a U.S. economist with BNP Paribas. The question now is whether that is "the magic number to generate the outcomes the Fed is looking for....They could potentially be wrong about that number."

Estimates of the impact previous rounds of bond purchases had on the economy provide a yardstick for measuring how much impact those additional $450 billion in purchases could have. San Francisco Fed President John Williams estimated that the $600 billion program that ran from late 2010 to early 2011 lowered 10-year bond yields by about 0.2 percentage point—equal to the impact a quarter-point cut in the Fed's benchmark short-term interest rate would typically have, which Mr. Williams calls "a big change." By that math, the Fed's additional purchases next year should be about three-fourths as powerful.

While not the goal of the bond-program, the holdings also have earned the Fed—and in turn U.S. taxpayers—some hefty profits in recent years—more than $350 billion since 2009. The Fed earns interest on the bonds and is required to use its income to cover its operating expenses and send much of the rest to the Treasury's general fund, where it is used to pay government bills and benefits.

Write to Victoria McGrane at victoria.mcgrane@wsj.com

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