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MNI: Fed's QT Likely To Be Bumpy Process - Jackson Hole Paper

(MNI) WASHINGTON
(MNI)

The Federal Reserve's process of rolling assets from its balance sheet could be bumpy and the central bank should be wary of quantitative easing in the future because it makes the banking system dependent on ever larger liquidity infusions, according to research presented Saturday at the Kansas City Fed's annual Jackson Hole conference.

When the Fed buys assets and expands reserves banking deposits increase and become more demandable also resulting in more corporate lines of credit, the paper said. "We observe little reversal of all this during quantitative tightening. We argue that this asymmetric behavior can explain tightening liquidity conditions and occasional stress when quantitative tightening is underway, despite the central bank balance-sheet being large relative to historical standards," the authors concluded.

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The Federal Reserve's process of rolling assets from its balance sheet could be bumpy and the central bank should be wary of quantitative easing in the future because it makes the banking system dependent on ever larger liquidity infusions, according to research presented Saturday at the Kansas City Fed's annual Jackson Hole conference.

When the Fed buys assets and expands reserves banking deposits increase and become more demandable also resulting in more corporate lines of credit, the paper said. "We observe little reversal of all this during quantitative tightening. We argue that this asymmetric behavior can explain tightening liquidity conditions and occasional stress when quantitative tightening is underway, despite the central bank balance-sheet being large relative to historical standards," the authors concluded.

Keep reading...Show less