Monetary policymakers are trying to steer the economy in the right direction, but they have few tools at their disposal to do so. More important is the interest rate. This has been steadily increasing in the United States and Europe over the past year and a half. Increasing this amount may stifle the economy. Now the balance sheet of central banks is being discussed.
Why is this important?To stimulate the economy, central banks use a technique called “quantitative easing.” They buy government bonds and thus inject money into the economy. Now that inflation is still above the 2% target and central banks do not want to raise interest rates further, the opposite move is being considered: “quantitative tightening.” Central banks sell their assets to reduce the money supply in the economy, hoping to further curb inflation.
- The Federal Reserve initially relied on quantitative easing to mitigate the effects of the economic crisis in 2008. The Federal Reserve, the US central bank, then doubled its total balance sheet in two months.
- Since February 2020, before the coronavirus pandemic, the total balance sheet has nearly doubled. The amount now on the balance sheet is eight times the amount in 2008. Now is the time to reduce this balance again, under the necessary conditions.
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