The US Federal Reserve and the European Central Bank have made clear that they intend to roll back quantitative easing by reducing their bond holdings. But the other driver of central banks’ balance-sheet expansion for the past 15 years – the provision of abundant reserves to the financial sector – remains up for debate.
LONDON – Central banks have drastically changed the way they implement monetary policy. Since the 2008 global financial crisis, the US Federal Reserve and the European Central Bank have been providing liquidity directly to banks and other financial institutions – an activity that used to be the preserve of money markets – and massively expanding their balance sheets. Is it time to reverse these changes, reviving interbank money markets and shrinking central-bank balance sheets, or is this the new normal?
LONDON – Central banks have drastically changed the way they implement monetary policy. Since the 2008 global financial crisis, the US Federal Reserve and the European Central Bank have been providing liquidity directly to banks and other financial institutions – an activity that used to be the preserve of money markets – and massively expanding their balance sheets. Is it time to reverse these changes, reviving interbank money markets and shrinking central-bank balance sheets, or is this the new normal?