The Fed’s large-scale asset purchases (LSAPs, popularly known as QE) have been tapering off for some time now and are expected to end this month. But even though the Fed won’t be making any new purchases, it will still have the largest balance sheet in history. All the securities it has purchased in three rounds of QE and Operation Twist are sitting on its balance sheet. And the banking system is awash with the excess reserves created as a consequence of those purchases.So should it unwind QE, and if so - how?
It is clear now that monetary base creation on this scale does not cause runaway inflation, as was feared by many. And it does appear to have prevented the US from experiencing severe deflation in the aftermath of the financial crisis. But as the US economy recovers, the question arises whether the Fed should start shrinking its balance sheet – unwinding QE.
Read on here.