Interest Rates and Shrinking the Fed Balance Sheet

来源: CHINA FOREX 2017 Issue 2 作者: Zhong Wei, Guan Qin

Since the beginning of 2017,two issues have attracted great attention in financial circles. One is the pace of increases in US interest rates and the other is how soon the Federal Reserve will reduce the size of its balance sheet. Both are likely to have an impact on China's central bank as well as the Fed. The Fed has made clear it has shifted from quantitative easing to gradual increases in interest rates. It has also said it wants to unwind the US$4.5 trillion in bonds on its balance sheet,according to statements by Fed officials,including Chairwoman Janet Yellen. China's economy is showing stable growth. The sound and neutral monetary policy now in effect,combined with regulatory policies that promote financial deleveraging,set the stage for an increase in market interest rates and an adjustment of asset prices. Market players are speculating whether the People's Bank of China will push for what would be a Chinese version of shrinking the domestic balance sheet. Where are US and Chinese interest rates headed and will there be balance sheet reductions in either country? These are among the topics in our latest round table discussion.

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Zhong Wei,deputy director of China Forex,leads the discussion with Guan Qingyou,vice president of Minsheng Securities,and Lin Caiyi,chief economist of Guotai Junan Securities.

Zhong Wei: The US Federal Reserve has moved to push interest rates higher,but when will it shrink its balance sheet? Former Fed chief Ben Bernanke,the initiator of the quantitative easing policy in the United States,insisted that shrinking the balance sheet would not be difficult. However,the Fed has found that this is in fact not so easy to do. It needs to carefully consider the strength of US economic growth,high asset prices and changes in international capital flows among other factors. In your opinion,given the quantitative easing and the vast enlargement of the balance sheet under Bernanke and his successor Janet Yellen,what are the right conditions for the Fed to reduce the size of the balance sheet? When might this actually take place?

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