The Federal Advisory Council is a group of 12 leading bankers, each one chosen by one of the 12 Federal Reserve Banks. They meet four times a year to advise the Fed on current and proposed monetary policies.
Their records used to be secret, until Bloomberg sued for access to the February 2013 minutes under the Freedom of Information Act. After the court ruled in Bloomberg’s favor, the Fed has decided to start publicly posting the minutes of FAC meetings.
We have learned from the May minutes that several of the largest banks in America are worried about the efficiency and dangers of the Fed’s present quantitative easing program, which consists of buying $45 billion a month in government debt and $40 billion a month in mortgage-backed securities (financial instruments backed by mortgages being paid), stating “Current policy has created systemic financial risks and potential structural problems for banks.”
The Council notes that one result of the Fed buying up so many mortgages a month is that the banks are losing a source of revenue:
“The Fed’s aggressive purchases of 15-year and 30-year MBS have depressed yields for the ‘bread and butter’ investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk,” also noting “Given the Fed’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.”
While in February, the FAC endorsed QE3, doubts have now arisen: “The effectiveness of the policies in producing healthy economic and employment growth is not clear. Uncertainty about fiscal and monetary policy is deterring business investment that would spur growth.”
They also worry how the Fed is going to be able to extricate itself from “QE to infinity,” noting: “While some believe monetary policy may not be accommodative enough in light of current government fiscal policy, others believe that constant injections of new reserves have not returned the economy to the vibrant upbeat model it used to be and that current monetary policy is ineffective.”
and look ahead to the pain that stopping the “money printing” will bring about: “Uncertainty exists about how market will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accomodation, and the end of monetary easing may be painful for consumers and businesses.”
But in the end, acknowledge that they see no end in sight for quantitative easing: “Based on economic forecasts, and in light of ongoing economic weakness, continuing fiscal policy restraint, and the recent downturn in inflation, it is likely that current policy accommodation will continue for one to three years.”
You can read the whole minutes of the May FAC meeting at the Federal Reserve website: http://www.federalreserve.gov/aboutthefed/fac-20130517.pdf