The Fed’s $7 trillion balance sheet shrank last week for the first time since February and its repo balance — short-term funding deals for commercial banks — has plunged to nine-month lows. But that is because money market funding strains have abated and other central banks are tapping the Fed for fewer dollars.
GRAPHIC: G4 central bank balance sheets - here
Given the improving growth and markets picture, some tinkering with policy settings may be inevitable.
“Policy is on an emergency dial at the moment and clearly emergency settings are not supposed to be indefinite,” said Sarah Hewin, chief Europe economist at Standard Chartered.
“They are saying QE is in place and we don’t think there is a need to be going full pelt.”
It also could be that policymakers are getting queasy about debt levels: Britain’s public debt ratio recently surpassed 100%. This is why the Bank for International Settlements, the umbrella group for central banks, is urging efforts to return policy to “a new normal”.
But few expect a serious rowback soon. The global economy is expected to contract 6% this year, with further lockdowns still a risk.
There are also lessons from the past. The ECB’s 2011 interest rate rise and the Fed’s move that year to start shrinking its balance sheet are often blamed for strangling the recovery after 2008.
“Willingness to keep the taps open and not retrace course too early — that’s one of the big lessons from the financial crisis,” said Jeroen Blokland, portfolio manager at Robeco.
“Central banks will try to remove some stimulus only if the recovery is structural.”
Reporting by Sujata Rao; Additional reporting by Karin Strohecker, Dhara Ranasinghe and Ritvik Carvalho; Editing by Catherine Evans