Finance time

Congress and the Obama administration are taking a bigger role in the rescue of the economy from the Federal Reserve, shifting the strategy to stimulus spending from central bank lending.

The amount the Fed and U.S. agencies have lent, spent or guaranteed has fallen 15 percent since September to $8.2 trillion, the lowest in a year, based on data compiled by Bloomberg. Spending on infrastructure, tax breaks and other fiscal measures account for 52 percent of the total, up from 39 percent in March, as central bank loan programs are phased out.

The change marks a new phase of public intervention in the economy. Congress and the administration’s $4.2 trillion portion, which amounts to 30 percent of everything produced in the country this year, also complicates any future exit strategy. It may be tough for elected officials to quit spending, prolonging the bailout and adding to the federal budget deficit.

“There’s a danger of getting addicted to fiscal stimulus programs,” said David Wyss, chief economist with New York-based Standard & Poor’s, in an interview. “The Fed can print money. Government has to raise taxes or borrow more.”

The U.S. House of Representatives last week increased the federal government’s debt ceiling $290 billion to $12.4 trillion. It also passed a $154 billion economic aid package to pay for extended unemployment benefits, new infrastructure projects and help to state governments.

Stimulus Packages

Commitments by Congress to spend more than $984 billion, or about 8 percent of the national debt, include stimulus packages championed by President Barack Obama and President George W. Bush and a November 2008 change in the tax code to encourage large banks to buy smaller ones.

The U.S. has run 14 consecutive monthly budget deficits and 7.3 million people have lost their jobs since the beginning of the recession in December 2007, according to the Treasury Department. Monthly budget shortfalls have outnumbered surpluses almost 2 to 1 this decade, according to Treasury data.

“We can’t continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard-earned tax dollars of the American people can be treated like Monopoly money,” Obama said Dec. 21 at the White House.

The Obama administration still has about half its $787 billion stimulus package to spend, according to the Office of Management and Budget.

The Fed has shut or is phasing out the 10 support programs it created after August 2007 as the financial system recovers from the longest recession since the 1930s.

European Central Bank

As the economy improves, policy makers are pulling back liquidity to prevent inflation and asset bubbles. The European Central Bank last week raised the interest rate on its tender of 12-month loans to the one-year average of the bank’s benchmark, a departure from its policy of offering the money at a fixed 1 percent. The ECB said it will also cease lending for six months at the end of the first quarter.

The S&P 500 Index has climbed 24 percent this year, its second-biggest annual percentage gain this decade. That has helped banks make money outside of Fed programs. In the first nine months of the year, Goldman Sachs Group Inc.’s trading revenue doubled to a record $27.3 billion, while JPMorgan Chase & Co.’s climbed 122 percent to $17.9 billion, according to company reports.

Spreads on U.S. corporate debt, which show the risk premium that investors demand to own them instead of government bonds, have plunged to below 2 percentage points from more than 6 percentage points at the start of the year, according to the Merrill Lynch U.S. Corporate Master Index. That’s the most spreads have narrowed this decade, the data show.

‘Walking a Tightrope’

The Fed’s plan to buy $1.25 trillion of mortgage-backed securities is its largest spending program. The Fed holds $901.2 billion of the securities and is scheduled to complete the purchases in the first quarter.

That will leave the central bank “walking a tightrope” between blocking economic recovery and sparking a rise in prices, according to Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York.

The Fed’s balance sheet ballooned to $2.24 trillion in assets as of last week, up 142 percent from the beginning of 2008. Selling some of those assets to take money out of the economy has its risks, Greenhaus said.

“You have to ensure economic expansion without fanning inflation and assess prospects for asset bubbles while bringing down the unemployment rate,” Greenhaus said in an interview. “The difficulties can’t be easily dismissed.”

Price Rise

Consumer prices rose 1.8 percent in November compared with a year ago and have increased by an average 2.6 percent over the last decade, according to the U.S. Bureau of Labor Statistics.

As U.S. banks have rebuilt their balance sheets after taking $1.1 trillion of losses and writedowns, according to data compiled by Bloomberg, they’ve tapped the central bank less.

The Fed said there’s been no borrowing from the Term Securities Lending Facility since mid-August and from the Primary Dealer Credit Facility since mid-May. The central bank will phase out both programs. The Asset-Backed Commercial Paper Money Market Fund Liquidity Facility hasn’t attracted customers since May. The Fed has indicated it will expire Feb. 1.

The Fed will shorten the maturity dates of primary credit loans at the discount window to 28 days from 90 days starting Jan. 14 as banks are better able to find funding themselves. The central bank said it will close the Commercial Paper Funding Facility, the Primary Dealer Credit Facility and swap lines with foreign central banks on Feb. 1 and the Term Asset-Backed Securities Loan Facility, or TALF, on June 1.

The Money Market Investor Funding Facility, known as MMIFF, was shuttered on Oct. 30. The Fed’s planned purchase of $300 billion of longer-term Treasury securities was also completed at the end of October.

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