Question

1. After three rounds of quantitative easing over the last ten years, how has the Federal Reserve’s balance sheet changed from 2008 to 2019; mainly, what are now the largest asset and liability exposures for the Fed?

Answer 1

Ans) Recently in July Fed announced its decision to cut its benchmark short term interest rate by one quarter of a percentage point to target range between 2%-2.5%. The rate cut was first in a decade as reported by media.

Starting 2016, gradual rate increase and assets sale to combat the recession by global financial crisis (GFC), for too long. It has rises the assets to $4 trillion. Earlier to GFC interest rate were near zero and total assets were less then $900 billion.

Cut in interest rate is announced for the increase in investment but there are various adverse effect of unconventional monetary policy adopted by Fed. As this can encourage the demand of money for speculation motive as done before the GFC which results in recession. Many other developed countries have cut their interest rate but by the decision of Fed the demand for dollar will increase , specially for US treasury which will result in dollar appreciation and now the position of US in trade also is very competitive. The Fed have now decreased their assets from $4 trillion to $3.8 trillion from DEC 2015 to July 2019. The step taken by Fed can change the track of growth for US economy.

After the rate cut the tariff is imposed on imports from China as announced by Trump, 10% on $300 billion worth of imports and tariff may be higher to 10%,15%, or 20%. This may be the adverse effect for both the US and for global. The reduction of interest rate can rise the regime of negative interest all over the world.