Billionaire investor Warren Buffett compared the Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.
“The Fed is the greatest hedge fund in history,” Buffett told students last week at Georgetown University in Washington. It’s generating “$80 billion or $90 billion a year probably” in revenue for the U.S. government, he said. “And that wasn’t the case a few years back.”
The central bank has been buying $85 billion of bonds a month to help the U.S. recover as it emerges from the deepest slump since the Great Depression. Chairman Ben Bernanke and other Fed policymakers unexpectedly opted this week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy.
The Fed remitted $88.4 billion to the Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.
The Fed “is under no pressure, none whatsoever to have to deleverage,” Buffett said. “So it can pick its time, and if you have somebody wise there — and I think Bernanke is wise, and I certainly expect his successor to be — it can be handled. But it is something that’s never quite been done on this scale. It will be interesting to watch.”
Bernanke steered the Fed through the 2008 crisis, and his term ends in January. President Obama hasn’t nominated a successor, who will oversee the policy’s wind-down.
Fed Vice Chairman Janet Yellen is Obama’s leading candidate to replace Bernanke after former Treasury Secretary Lawrence Summers withdrew his name from consideration, people familiar with the matter said this week. The president has also said that he’s weighing former Fed Vice Chairman Donald Kohn for the post.
Buffett praised Bernanke for signaling in 2008 that he’d do whatever was needed to stabilize markets and said the next chairman should follow his approach to economic stimulus. Investors expected a taper by Bernanke, who said last week that he wants to see further gains in U.S. employment before scaling back the bond purchases.
“He says he’s going to keep doing it until he sees more improvement in the economy, and I think he’s been mildly disappointed — not hugely disappointed — in the rate of improvement in the economy in the last few years,” Buffett said. “He’s not prejudging exactly when it’s going to happen, he’s telling you the conditions under which he’ll change.”
Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said the decision not to slow bond buying was a close call and “small” tapering is possible next month.
“Buffett, 83, became the world’s fourth-richest person by building Omaha, Neb.-based Berkshire Hathaway Inc. into a $290 billion business.