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December 12, 2022

Federal Reserve’s Unprecedented Monetary Policies Disconnected Asset Pricing from Risk, Unleashed Moral Hazard, Fueled a Debt Boom, and Created Systemic Instability

WASHINGTON, D.C.— President and CEO Dennis M. Kelleher issued the following statement in connection with the Federal Reserve’s FOMC meetings this week and released a Fact Sheet on the Federal Reserve’s actions decoupling asset pricing from risk from 2008-2022 and creating systemic instability.

“While most of the attention this week will be on the Federal Reserve’s Federal Open Market Committee’s decision to raise rates and by how much, it is important to understand how many of the Federal Reserve’s own unprecedented policies over the last 14 years have contributed to many of the risks they are now trying to address. Since the 2008 global financial crisis, the Fed’s actions have disconnected the fundamental relationship between asset prices and asset risks, which unleashed rampant moral hazard, ignited an historic debt boom, and created systemic instability.  This vital context is detailed in a Fact Sheet being released today.

“The scale and scope of many risks facing policymakers today didn’t start with the 2020 pandemic-related stress or Russia’s attack on Ukraine in 2022. It started with the Fed’s overly accommodative policies starting in 2008 that were implemented with few if any reasonable checks along the way, including mis-formation and misallocation of capital and numerous other collateral consequences. At key points along the way during the extended periods of near-zero nominal rates (and often real negative rates) and an increase in its balance sheet from less than $1 trillion to almost $9 trillion, the Fed should have been assessing the long-term risks and adverse effects of its policies before those policies became further and further entrenched in our financial markets and economy.  Reflection and recalibration were warranted long before today’s dramatic policy U-turn, euphemistically referred to as a ‘pivot.’

“After 14 years of overly accommodative monetary policy that disconnected the price of assets from their actual risks, the Fed’s actions could have catastrophic consequences as historically high levels of debt are repriced as the Fed’s prior intentional underpricing of risk begins to swing rapidly in the other direction as rates rise.  While not often mentioned, monetary policy and financial stability are deeply interconnected, and the reversal of the policies that led to the buildup of these risks could likely result in the dramatic realization of them.

“Therefore, it is critical that policymakers address the many financial stability risks as aggressively as they are taking monetary policy actions to address inflation. Additionally, unlike in the past, the Fed must more fully and appropriately consider in real-time the potential long-term adverse effects of its ongoing historic actions. Continuing with policy effectively on autopilot, especially when it is not data-based due to time lags, policymakers risk the continuation of unchecked distortionary policies and putting the American public into another cycle of massive risk explosions that can only be addressed similar policies amplifying those risks, as has happened over the last 14 years.”

You can find the Fact Sheet here.


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