Monday, October 25, 2010
QE2, perhaps, but Fed slowly reducing its balance sheet.
There's been a lot of talk about QE2 and the Fed has been purchasing bonds (setting bond rates lower), but it's also been quietly reducing its balance sheet.
These are the total amount of bonds purchased so far in Oct (millions $)
And here is the Fed's balance sheet:
So, yes, bonds have been bought, but as I said, that’s how the Fed sets rates lower.
The important thing, however, is that the Fed’s balance sheet (factors affecting reserve balances) have gone down. So while it is buying bonds, it is also selling other assets or allowing certain liquidity programs to expire. The total amount of reserves credited to the banking system has fallen. No net new “money” has been added.