Could you explain in simple terms why the Fed exiting its balance sheet, by selling its assets would cause inflation? I understand that if they sell a large amount of bonds into the market, that it will cause bond prices to go down and thus yields to shoot up, right?
I just can't seem to understand exactly how the whole excess reserves and inflation come into play if the Fed exits..
Thanks!
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If the Fed were to sell off its balance sheet, theory suggests that would reduce inflation. Not increase it.
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