The Federal Reserve’s unprecedented monetary policy has separated asset pricing from risk, sparked moral hazard, fueled a debt boom and created systemic instability

WASHINGTON, DC President and CEO Dennis M. Kelleher made the following statement in connection with this week’s Federal Reserve FOMC meetings and released a fact sheet on Federal Reserve actions that will decouple asset pricing from risk from 2008 through 2022 and create systemic instability.

“While most of the attention this week will be on the Federal Reserve Open Market Committee’s decision to raise interest rates and by how much, it’s important to understand how many of the Federal Reserve’s own unprecedented actions over the past 14 years are too many contributed to the risks they now want to counter. Since the 2008 global financial crisis, Fed actions have disrupted the fundamental relationship between asset prices and asset risks, unleashing rampant moral hazard, fueling an historic debt boom and creating systemic instability. This important context is detailed in a fact sheet published today.

“The scale and scope of many of the risks facing policymakers today did not begin with the 2020 pandemic-related stress or Russia’s attack on Ukraine in 2022. It began with the Fed’s overly accommodative policy beginning in 2008, implemented with few, if any, adequate controls along the way, including malformation and misallocation of capital and numerous other side effects. At key points along the way during extended periods of near-zero nominal interest rates (and often real negative rates) and its balance sheet growing from less than $1 trillion to nearly $9 trillion, the Fed should have assessed the long-term risks and downsides effects of his policies before these policies became more and more entrenched in our financial markets and our economy. Reflection and recalibration were warranted long before today’s dramatic policy reversal, euphemistically dubbed “pivot.”

“After 14 years of overly accommodative monetary policy that decoupled the price of assets from their actual risks, the Fed’s actions could have catastrophic consequences as historically high levels of debt are repriced while the Fed’s previous deliberate underpricing of risks quickly translates into the other Direction begins to swing toward rising interest rates. While not often mentioned, monetary policy and financial stability are closely linked, and the policy reversal that has led to the build-up of these risks could likely lead to their dramatic realization.

“It is therefore crucial that policymakers address the many risks to financial stability as aggressively as they take monetary action to combat inflation. In addition, unlike in the past, the Fed must more fully and appropriately consider in real time the potential long-term negative impact of its ongoing historical actions. If policies are effectively continued on autopilot, especially if they are not data-driven due to time lags, policymakers risk perpetuating unchecked distorting policies and plunge the American public into another cycle of massive explosions of risk that can only be addressed with similar policies, amplifying these risks, as has happened over the past 14 years.”

You can find the fact sheet here.

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