With inflation surging, the leadership of the Federal Reserve seems ready at last to pull back on the quantitative easing (QE) program it initiated more than a decade ago. If the central bank’s intended downsizing of its asset holdings proceeds as planned (and is not interrupted by another downturn), the effect will be to add to the sums the U.S. Treasury must borrow from non-Fed creditors in the coming years.
QE began in late 2008 as an improvised -- and, presumably, temporary -- response to the financial crash. As private banks and investment firms reeled from the collapse of the housing market, the Fed stepped in and bought hundreds of billions of dollars of mortgage-backed securities (MBS) which had become exceptionally risky investments because of the sub-prime fiasco. The funds for these purchases came from the Fed’s authority to create bank reserves -- the equivalent of printing money.
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