EconExtra: All Eyes are on the Fed Steadiness Sheet

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EconExtra is a collection of posts that transcend the textbook, relating present occasions and up to date developments in economics to content material requirements, and offering useful resource solutions that can assist you incorporate the present occasions into your classes.

 

The Headlines

Omicron, inflation, provide chain points, a possible Russia/Ukraine struggle, and the Federal Open Market Committee Assembly all wreaked havoc in markets this week. Pundits have been questioning if the Fed would announce an rate of interest hike, their major device in modulating the economic system.  However they have been additionally questioning if the Fed would give any indication as to when and the way they’ll start to cut back the dimensions of their steadiness sheet, which has grown to $9 Trillion. (You possibly can really see the Steadiness Sheet right here.)

If you need, you’ll be able to have college students learn the precise Fed press launch and/or watch the Press Convention with Chairman Jerome Powell following the discharge (it runs 55 minutes.) However CNBC summarized the Fed’s actions properly. Backside line is that the Fed left rates of interest at 0-.25% however hinted that a rise is imminent (the subsequent alternative being on the March assembly.) The final time the Fed raised the rate of interest was in December 2018. Nothing was talked about in regards to the steadiness sheet within the press launch.

 

Understanding The Situation

The steadiness sheet was clearly mentioned within the conferences, however with out deciding on particular actions presently. Nevertheless, a doc was launched following the assembly that said the Rules that might be adopted to cut back the steadiness sheet. That CNBC article summarizes these rules as properly. It seems that the Fed won’t alter their tapering plan, {that a} wind-down of belongings received’t start till rates of interest are raised (as situations for one might be ample for the opposite), that the Fed might be clear in regards to the actions when the time comes, and that their desire might be to carry Treasuries, and never the asset-backed securities they’ve been shopping for.

 

The phrases used relating to these adjustments to the Fed Steadiness Sheet are Quantitative Easing (asset purchases), and Quantitative Tightening (asset gross sales). Somewhat little bit of accounting is useful in understanding and explaining what is definitely occurring right here, and the way these purchases and gross sales impression the supply of credit score. There’s a web site known as FedGuy.com that could be a good supply for assist right here. Particularly, right here is the submit explaining Quantitative Easing (QE) from September 2020, and right here is the parallel submit explaining Quantitative Tightening (QT) from this month.

 

Lesson Thought

1) Recreate the steadiness sheet entries from these articles for QT and/or QE together with your class. You might do that bodily by placing account T-charts of the assorted entities concerned on the board, and hand out the entries written on playing cards or post-its to the scholars. You would possibly shade code these playing cards to match up each side of every transaction. Then name college students holding the playing cards to convey them up and place them within the right aspect of the right account, and discuss by way of what is definitely occurring.

One would possibly need to begin with the QT instance as a result of that is what the Fed is anticipated to start out doing, and in addition as a result of the instance given is a little more simple. The QE instance has many various types relying on the events concerned. In the event you deal with QT for demonstration functions, QE may be offered as the alternative.

 

2) Observe-on discussions can go just a few alternative ways, however you’d mainly need to work by way of the impression of the actions in both/each instances on money and credit score.

  1. Why/what does this motion “ease” (for QE) or “tighten” (for QT). What are the implications for the costs of different belongings (shares) throughout easing or tightening?
  2. Why does the Fed start QT with modest reductions? What limits how massive a discount the Fed could make every month? What occurred in September 2019 that made the Fed cease tightening? 
  3. QE has been equated to “printing cash.” Underneath what situations would possibly this set off inflation? Have these situations been met in the course of the pandemic, or are different components driving present inflation?



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