How Can The Fed Possibly Unwind QE?

By Alasdair Macleod – Re-Blogged From http://www.Silver-Phoenix500.com

There are currently two important items on the Fed’s wish list. The first is to restore interest rates to more normal levels, and the second is to unwind the Fed’s balance sheet, which has expanded since the great financial crisis, principally through quantitative easing (QE). Is this not just common sense?

Maybe. It is one thing to wish, another to achieve. The Fed has demonstrated only one skill, and that is to ensure the quantity of money continually expands, yet they are now saying they will attempt to achieve the opposite, at least with base money, while increasing interest rates.

Both these aims appear reasonable if they can be accomplished, but the game is given away by the objective. It is the desire to return the Fed’s interest rate policies and balance sheet towards where they were before the last financial crisis, because the Fed wants to be prepared for the next one. Essentially, the Fed is admitting that its monetary policies are not guaranteed to work, and despite all the PhDs employed in the federal system, central bank policy remains stuck in a blind alley. Fed does not want to institute a normalised balance sheet just for the sake of it.

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Neutralizing the Bank Free Reserves Time Bomb

cropped-bob-shapiro.jpg   By Bob Shapiro

The US Money Supply is about to soar. Since general price levels in the US Economy, as measured by the CPI for example, are a direct consequence of Money Supply changes, Americans are in for a bout of high inflation over the next few years.

To understand why, we must look at one way that the FED works. The FED tries to contol the Money Supply by influencing Interest Rates. It does this mainly by buying and selling various securities, mainly short term US Treasuries.

If the FED buys these Treasuries, using newly created electronic Dollars, the Treasuries go on its balance sheet and the new Dollars make their way onto Bank balance sheets. New “demand” for the Treasuries push up their price, which causes the effective interest they pay to go down.

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