20 years: Trading & hedge funds
It did not take long after the introduction of QE for market commentators to become overly concerned about a future problem with the policy: what happens when the central banks unwind QE? In this video, Trevor discusses the issues associated with unwinding the policy, the stages of QE and the timing of the unwind.
It did not take long after the introduction of QE for market commentators to become overly concerned about a future problem with the policy: what happens when the central banks unwind QE? In this video, Trevor discusses the issues associated with unwinding the policy, the stages of QE and the timing of the unwind.
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12 mins 38 secs
This essentially involves a rapidly expanding economy that requires reversing QE in order to slow it down. To do this, central banks can take their time unwinding QE, and use interest rates to tighten policy where necessary. However, associated with this are a wide array of concerns; for example, huge central bank losses.
Key learning objectives:
Identify the 4 stages of QE
Understand the biggest concerns of the unwind
Identify the best time for banks to reduce their balance sheets
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In September 2009, the market provided strong evidence that the level of central bank reserves needed in the market is considerably higher than it was pre-crisis. The quantity of excess reserves held by the banks at the Federal Reserve dropped from about $2.9 trillion to $1.3 trillion of US Treasury bonds from 2014 to 2019.
The Treasury had just issued a large number of securities and investment banks were required to take up a higher than usual amount. In order to do this, they needed financing, putting pressure on overnight borrowing markets. The net result was that overnight borrowing rates went from 2% to 10%. The FED responded aggressively by adding liquidity, buying t-bills and extending repo operations. This brought back down the rate. Hence, clearly showing the market cannot function properly if QE is totally unwound.
This content is also available as part of a premium, accredited video course. Sign up for a 14-day trial to watch for free.