Growing the Fed Balance Sheet, QE etc.

pocketdooz

Could somebody offer an easy explanation of what happens as the Federal Reserve "grows its balance sheet" and what QE is please?

Thanks.

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Time Magazine

The BoE's "What is QE?" pamphlet.

Économiste Monétaire

The (NY) Fed buys an asset (Treasuries, MBS, et cetera.) from an institution by creating new reserves, and adding this to the institution's account with the Fed. 'Growing the balance sheet' means 'we're going to buy stuff with new money', basically. Table 9 in the 'Consolidated Statement' gives information on the Fed System's balance sheet. (Compare that with table 2 three years ago.)

pocketdooz

Time Magazine wrote: »

The BoE's "What is QE?" pamphlet.

Thanks, that's very helpful.

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pocketdooz

Économiste Monétaire wrote: »

The (NY) Fed buys an asset (Treasuries, MBS, et cetera.) from an institution by creating new reserves, and adding this to the institution's account with the Fed. 'Growing the balance sheet' means 'we're going to buy stuff with new money', basically. Table 9 in the 'Consolidated Statement' gives information on the Fed System's balance sheet. (Compare that with table 2 three years ago.)

So, the Fed creates money out of nothing and uses those funds to buy bonds etc, thus driving up the asset prices and driving down the yields? This is different than printing new notes though right?

Growing the balance sheet just involves adding bonds to the asset side of their BS .... ?

Shouldnt this lead to higher rates of inflation?

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pocketdooz

So what is the Fed's strategy for a sound exit to unwind its massive, and growing, balance sheet ...... especially in the light of pressure for fiscal austerity and deficit reductions?

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Économiste Monétaire

pocketdooz wrote: »

So, the Fed creates money out of nothing and uses those funds to buy bonds etc, thus driving up the asset prices and driving down the yields? This is different than printing new notes though right?

Growing the balance sheet just involves adding bonds to the asset side of their BS .... ?

Shouldnt this lead to higher rates of inflation?

.

That's why they bought $1 trillion + of MBS: to keep rates down. Whether this will cause inflation depends on what banks will do with the money. Just imagine that Trichet comes to your house with a printing press and you two scoundrels print off €1 trillion in new money. You then proceed to dig up your back garden and bury the money there; will this add to inflation? The money supply has increased but its 'velocity' is zero. If people don't want to borrow money, or a bank can't find credit worthy borrowers, then the new reserves just sit with the banks. This is similar to what happened in Japan for the last 10-15 years. You can see this from the FRED site:







This issue is touched-on in the St. Louis Fed's Monetary Trends release (first page).

pocketdooz wrote: »

So what is the Fed's strategy for a sound exit to unwind its massive, and growing, balance sheet ...... especially in the light of pressure for fiscal austerity and deficit reductions?

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The million dollar question .

Slippers 2

pocketdooz wrote: »

Growing the balance sheet just involves adding bonds to the asset side of their BS .... ?

The money that the Fed issues is described as liabilities of the Fed even though it is not redeemable. So, when it issues new money to buy the bonds both sides of the BS grow.