The Federal Reserve’s balance sheet is so out of whack that the central bank would be shut down if subjected to a conventional audit, Jim Grant, editor of Grant’s Interest Rate Observer, told CNBC.
With $45 billion in capital and $2.1 trillion in assets, the central bank would not withstand the scrutiny normally afforded other institutions, Grant said in a live interview.
“If the Fed examiners were set upon the Fed’s own documents–unlabeled documents–to pass judgment on the Fed’s capacity to survive the difficulties it faces in credit, it would shut this institution down,” he said. “The Fed is undercapitalized in a way that Citicorp is undercapitalized.”
Grant said he would support legislation currently making its way through Congress calling for an audit of the Fed.
Moreover, he criticized the way the Fed has managed the financial crisis, saying the central bank’s target rate should not be around zero.
“I think zero is the wrong rate for almost any economy,” Grant said, adding the Fed has “embarked on a vast experiment in moral hazard. Interest rates are the traffic signals in a market economy, and everything’s green. … You have to wonder whether these interest rates are the right clearing rate or rather they are the imposition of a central bank.”
Amid a disparity between analysts predicting there will be no rate hikes soon and the fed funds futures indicating tightening by the end of the year, Grant said he thinks the Fed indeed will begin raising rates as inflation creeps into the picture.