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May 2014

Quantitative Easing- An Exit In Three Acts

By Tarunkumar Singhal, Raman Jokhakar, Chartered Accountants
Reading Time 1 mins
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The first act in the exit from extraordinary monetary stimulus in the US began in January. The Fed has been trimming its bond purchases by $10 billion a month since then. Quantitative easing will end by December at the current strike rate.

The second act could start around July 2015. Fed chairperson Janet Yellen has hinted that she may begin to push up the benchmark federal funds rate around that time if the US economic recovery stays on track.

There is a possible third act that nobody in the financial markets seems to be considering. The US central bank has quadrupled its balance sheet since September 2008—from $1 trillion then to $4 trillion now. The explosive growth in the monetary base has not been inflationary, but the return to normal monetary policy should eventually lead the Fed to monetary contraction. Such an endgame will be far more painful than what financial markets are anticipating.

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