The Fed’s great shrinking act

The smartest insight and analysis, from all perspectives, rounded up from around the web:

The Federal Reserve is “going on the financial equivalent of a diet,” said Heather Long at The Washington Post. Nearly a decade after the central bank began a bond-buying spree to stabilize the economy after the 2008 financial crisis, it’s ready to slim down — announcing last week that it will begin reducing its $4.5 trillion portfolio of government and mortgage debt. Many economists credit the Fed’s massive bond purchases, alongside its slashing of interest rates to near zero, with helping to pull the U.S. out of the recession. Now the Fed is signaling that “it believes the economy has finally bounced back.” This move takes the Fed into “uncharted territory,” said Binyamin Appelbaum at The New York Times. Just as the magnitude of the central bank’s purchases after the 2008 crisis were unprecedented — it more than quadrupled its holdings, from $900 billion to an unheard-of $4.5 trillion — so is this retreat. The Fed has simply never tried to unwind such a massive balance sheet. “No one can be certain what will happen.”

That uncertainty is why Federal Reserve Board Chair Janet Yellen wants the shrinking to be “as boring as possible,” said Nick Timiraos at The Wall Street Journal. She has telegraphed for months that the central bank intends to start slowly at first, allowing $10 billion worth of Treasurys and mortgage-backed securities to “roll off” the balance sheet each month, meaning they will mature and the Fed won’t reinvest the proceeds. That figure will gradually ramp up to $50 billion a month in a year. Those signals are one reason why “markets…

Read the full article at the Original Source..

Back to Top