The Federal Reserve\u2019s 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\u2019s Interest Rate Observer, told CNBC.<\/p>\n
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.<\/p>\n
\u201cIf the Fed examiners were set upon the Fed\u2019s own documents\u2013unlabeled documents\u2013to pass judgment on the Fed\u2019s capacity to survive the difficulties it faces in credit, it would shut this institution down,\u201d he said. \u201cThe Fed is undercapitalized in a way that Citicorp is undercapitalized.\u201d<\/p>\n
Grant said he would support legislation currently making its way through Congress calling for an audit of the Fed.<\/p>\n
Moreover, he criticized the way the Fed has managed the financial crisis, saying the central bank\u2019s target rate should not be around zero.<\/p>\n
\u201cI think zero is the wrong rate for almost any economy,\u201d Grant said, adding the Fed has \u201cembarked on a vast experiment in moral hazard. Interest rates are the traffic signals in a market economy, and everything\u2019s green. \u2026 You have to wonder whether these interest rates are the right clearing rate or rather they are the imposition of a central bank.\u201d<\/p>\n
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.<\/p>\n