Former Federal Reserve Chairman Ben Bernanke used extraordinary tools to fight the financial crisis, and a decade later the Fed is having a hard time putting them away.
When Lehman Brothers failed 10 years ago, the Fed and other government agencies took all types of actions to head off a collapse of the financial system and to bolster the banking sector. Fed officials are still unwinding some of those moves, and chances are the hangover from those policies will be with them well into the future.
"It required a lot of creativity to come up with solutions that would stabilize the market and exist in the limit of the law," said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch. "The market is still dealing with a lot of these legacy issues today and it's taking a long time to undo some of the actions that were put in place during the financial crisis to ensure that a financial crisis like we had a decade ago doesn't happen again."
The Bernanke Fed used untested measures, such as pumping liquidity into the banking system, slashing interest rates to zero and buying Treasury and mortgage securities in a "quantitative easing" program that ballooned its balance sheet to a high of $4.5 trillion. In a post-crisis regulatory response, banks were reigned in, subjected to higher capital requirements and mandatory stress tests.
The Fed's balance sheet
Source: St. Louis Fed
Bernanke's successor, former Fed Chair Janet Yellen, made the first moves to "normalize" interest rates after the crisis. And now Fed Chairman Jerome Powell has been raising rates and chiseling away at the balance sheet with a program to "taper" back purchases of securities. The Fed had previously repurchased securities to replace all that were maturing, and now it only replaces some of them as they run off, shrinking its balance sheet as a result.
For consumers, the Fed's policy reversal means mortgage rates are rising, and other consumer loans are also more expensive. A 30-year fixed rate mortgage, now at about 4.6 percent, is well above the rate a year ago when it was less than 4 percent. Interest rate incentives, such as zero percent financing on autos, are also going away.
In the Treasury market, the 2-year note yield, which closely tracks Fed policy, was at 2.736 percent, the highest level since the summer before Lehman failed.