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Business News/ Opinion / Online Views/  What comes after the end of QE?
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What comes after the end of QE?

The balance sheet of the US Fed has grown by around five times since November 2008. What now?

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Quantitative easing is coming to an end. The US Federal Reserve decided this week to trim its monthly bond purchases by another $10 billion. It will likely wind down its bond purchases in October.

The central bank of the most powerful economy in the world began its unconventional programme of buying financial assets with newly-created money in November 2008 at a time when the global financial markets were almost frozen in fight following the implosion of investment bank Lehman Brothers. It thus unleashed a wave of liquidity that not only lifted economic activity but also led to asset bubbles in many parts of the world. Emerging market economies such as India also saw their currencies appreciate. Stock markets soared. However, global inflation remained muted despite the massive monetary expansion.

What now? The extent of the monetary expansion is evident in the chart that shows how the balance sheet of the US Fed has grown since November 2008. It is almost five times larger than it was six years ago. Much of the debate in the financial markets right now is when the US will begin to increase interest rates. An equally important question is whether it will try to bring the balance sheet size of its central bank to more normal levels through monetary contraction when the private sector mortgage bonds the Fed now holds are due for redemption. But nobody wants to talk about this right now.

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Published: 18 Sep 2014, 12:02 PM IST
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