Plot Thickens on End of QE & Start of Shedding Assets
Fed leads in trimming its balance sheet; Bank of England governor publishes the reasoning for central banks to shed assets – before raising interest rates. A big shift!
The Fed has been cutting back for weeks on its asset purchases, and on its last weekly balance sheet, its total assets actually fell by $74 billion. Now Bank of England Governor Andrew Bailey published a piece on Bloomberg Opinion today in which he wrote that these massive central-bank balance sheets – he was talking in global terms – “mustn’t become a permanent feature.”
“As economies recover, it’s likely that some of the exceptional monetary stimulus will need to be withdrawn,” he said. And this shedding of part of the bonds that had been purchased would happen before the central bank raises interest rates, he said.
This is the opposite of how the Fed did it last time: It started raising rates in December 2015 and started shedding Treasury securities and MBS in October 2017.
This time, the Fed front-loaded $2.8 trillion in QE and has already started shedding some of it even as FOMC members don’t see interest rate hikes through 2022. This is a big shift, of reducing the balance sheet first, and then raising rates.
In Bailey’s piece, there was no word of negative interest rates or yield curve control. What he is saying is that the balance sheet became the primary tool for adding stimulus and will become the primary tool for withdrawing stimulus, as interest rates remain near-zero.
And he is saying that the BOE’s balance sheet isn’t going to stay this massive for long and that it will undo some of the accommodation as the economy figures out where the new normal is.
The Fed is leading. The BOE is publishing the reasoning for other central banks to do the same.
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