The Dividend Cafe The Fed Part No One is Talking About
Aug 22, 2025
Dive into the complexities of the Federal Reserve's balance sheet, focusing on quantitative easing and tightening. Explore the historical impact of these policies since the 2008 financial crisis. Discover how QE has shaped financial markets and compare the U.S. approach to Japan's. Speculation abounds on the implications of an upcoming speech by Fed Chairman Jerome Powell, with market expectations hanging in the balance. Gain insights into the Fed's strategy for stimulating credit growth while navigating current economic challenges.
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Balance Sheet Became A Policy Tool
- The Fed uses its balance sheet (assets/liabilities) as a major monetary policy tool alongside interest rates.
- QE involved buying bonds to create liquidity and credit central bank money into banks to stabilize markets.
The Evolution From QE1 To QE3
- David Bahnsen recounts QE1 in 2008 and subsequent QE rounds through QE3, describing motivations and timing.
- He highlights QE3 as the transformative, open-ended bazooka that lasted into 2014 and changed expectations.
Japan Model Shaped Fed Thinking
- The US never matched Japan's extreme bond ownership, but adopted similar logic that QE wouldn't automatically spark inflation.
- Early QE kept inflation low, which encouraged further use of balance-sheet tools.