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The use of QE as a monetary policy tool was not a one-off

As the U.S. economy has continued to show signs of improvement, reflected primarily in the underlying labour market conditions and rising inflation, the Federal Open Market Committee’s (FOMC) focus is gradually shifting on the unwinding of the non-conventional monetary policy tools that were deployed during and after the Global Financial Crisis. The use of the Federal Reserve’s balance sheet was decided during a period of extreme and extraordinary economic distress, and many economists believe that its use should be confined to similar types of crises. There are others, however, that assert that the underlying structural changes in U.S. economy will or might require more frequent use of quantitative easing going forward.
If short-term rates remain low by historical standards there is a relatively high probability that if a severe economic downturn occurs the efficacy of short-term rates will once again be limited, as they will re-approach the zero bound. Thus, central bank balance sheet utilization will most likely become a more typical monetary policy tool alongside short term rates.

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Iniohos Advisory Services

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