For more than five years the Federal Reserve has conducted an unprecedented monetary expansion. Over this stretch the Fed's balance sheet has tripled. Its key interest rate has been zero since December 2008, forcing down rates across the credit spectrum on everything from mortgages to municipal bonds. Various programs and objectives have been used to keep the ride going. What was conceived of as an emergency measure to provide liquidity to the banking system has morphed into a stimulus program that the Fed says is now supposed to heal the labor market. The real question is, who's benefited from this?
The answer is the economy's biggest borrowers. That starts with the government. Thanks to the Fed's bond-buying, Washington has been able to squeeze down interest payments as a percentage of the federal budget as it takes on record levels of debt. Last month Bloomberg reported that the Fed is absorbing about 90 percent of new issuance of Treasury and mortgage-backed debt. With the central bank as the ready buyer, Congress feels no market pressure to curtail its profligacy because paying for it has never been easier with the Fed's suppression of free-market interest rates. Why don't more "Tea Partiers" on Capitol Hill speak out against this?
Meanwhile, blue chip firms have seen their borrowing costs hit record lows. Bloomberg also reported that Disney sold three-year notes at a paltry 0.45% interest rate as part of a $3 billion offering that was its largest issuance ever. Overall, the market for top-tier corporate bonds is the frothiest in half a century. Investors who can't compete with the Fed for government debt are turning here for super-safe alternatives and bidding up prices. There is a similar story in municipal bonds which has hardly ruffled by rising unfunded pension liabilities and scattered local bankruptcies.