The Federal Reserve Act was made law on December 23, 1913 by Woodrow Wilson. The Act arose out of early century financial panics turning into runs on banks, and it intended to create a stable central banking system that would end bank failures. In its own words, its purpose would be to “provide for the establishment of Federal Reserve Banks, to furnish an elastic currency, to afford means of redistributing commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”
Exactly 100 years later, the Fed has announced a “taper-lite,” or a move to reduce bond purchases and the continuation of quantitative easing. Federal Reserve Chairman Bernanke is “pursuing a more accommodating monetary policy than ever before in Fed history” with this decision to taper, according to John Phelan for the Wall Street Journal.
This latest development in the Fed’s struggle to dig America out of a recession may be too little too late, however. Since 2008, when the Fed began QE by investing billions of dollars in its won Treasuries and securities, “stock markets have nearly doubled while the ‘real’ economy has hobbled along with 2% growth,” Phelan says. This has led to the interests of financial markets being exactly opposite to the interests of America’s actual economy.
Coincidentally, China announced its plans late last month to stop buying foreign-currency holdings. Yi Gang of the People’s Bank of China said, “It’s no longer in China’s favor to accumulate foreign-exchange reserves,” as quoted by Bloomberg. China is currently the largest foreign holder of U.S. debt, with about 7.5% according to Forbes. Defense Secretary Leon Panetta claims that China’s ownership of our debt is “non-problematic and non-threatening.”
Still, speculation stirs around whether China will decide to taper its holdings of U.S. debt faster than the U.S. can taper its recovery. Such a decision could have the potential to stop the party for all parties involved.