What if the Fed runs out of assets to perform QT
Know that this is a stupid question and is unlikely to happen anytime soon since the Fed’s current balance is still pretty huge. But what would hypothetically happen if the Fed is conducting QT but then it’s balance sheet dwindles to 0. How is it able to continue to conduct QT if there’s no assets to sell? Cause the fed is able to theoretically purchase an unlimited amount of long term assets with their unlimited supply of money but isn’t able to the do the same with selling since there’s a fixed supply.
ok nerd
Intrigued to hear the answer but since the economy generally moves in cycles, there would have been a QE cycle before getting to a point where QT is needed so assets don’t fall below a certain threshold
Short the Vix and buy bitcoin
I think there is something like $60 Trillion USD held by the FED vs $20 Trillion in circulation to avoid issues like this. The number may be off since I remember learning about this a few years ago but the point is that the FED has “infinite” money
Not a stupid question at all! If the Fed’s balance sheet were to drop to zero, they wouldn’t be able to continue QT since they’d have no assets left to sell. QT works by selling assets, so once they’re all sold, it would stop.
That said, it’s extremely unlikely to happen. The Fed’s balance sheet is massive, and if they needed to tighten further after running out of assets, they’d likely use other methods, like raising interest rates.
Small correction - QT doesn't necessarily work by "selling assets". There's a difference between passive and active QT - i.e. allowing assets to roll-off at maturity vs. actively selling assets. At the moment, the Fed has been engaging in passive QT.
INFLATION - today's approach for Fed seems to be a seesaw btwn QE and QT to do their best to quell a potential massive hit to economy like crises of the past @ low double digit or even high single digit prime rate
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