The quantitative easing programs initiated by former Federal Reserve Chair Ben Bernanke has prompted the United States central bank to have a balance sheet that has swelled beyond $4 trillion. With the third round of QE dwindling – and the possibility of a fourth edition – what does the Fed plan to do with the balance sheet?
It’ll just keep an eye on it.
Fed officials say by simply cuddling with its astronomical balance sheet it can refrain borrowing costs from soaring, assist the central bank in increasing inflation to reach its two percent target and assist its five-year expansion assistance overseas, particularly in the middle east, Europe and China.
Of course, merely holding these bonds and Treasury securities is a form of stimulus because it limits the supply of securities in the public market and thus keeps prices high and generates low returns. This allows the benchmark interest rates to be low; hence supposed economic stimulus.
According to the minutes of the last meeting of the Federal Open Market Committee (FOMC), the Fed plans to end its buying of securities and mortgage bonds. However, with the market tanking in the last few weeks, the Fed may not actually conclude it entirely.
As we have reported in the past week, Fed officials have not completely ruled out the possibility of QE4 to keep the markets from entirely falling. We should find out the Fed’s intentions and viewpoints during the Oct. 28-29 meeting.
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