19 Jun 2017

Tightening by Stealth: Why keeping the balance sheet of the Federal Reserve constant is equivalent to a gradual exit

Daniel Gros

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Exiting from unconventional monetary policies is now a key issue for central banks, and especially for the US Federal Reserve. This paper argues that the Fed already began this exit some time ago, and that the relevant part of its balance sheet has already shrunk by about one-quarter of GDP. Pursuing the current policy of reinvesting would lead to a full exit within ten years.

This contribution was previously published in a column on VoxEU, 12 June 2017, and is republished by CEPS with the kind permission of VoxEU. It is based on research carried out by the author in connection with his study entitled “Implications of the expanding use of cash for monetary policy” commissioned by the European Parliament's Committee on Economic and Monetary Affairs, May 2017, and published as CEPS Policy Insight No 2017-21.

Daniel Gros is Director of CEPS.

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