The Federal Reserve raised interest rates from 1.00% to 1.25% as expected on Wednesday, and gave a hawkish statement. Janet Yellen set up plans to unwind the US Federal Reverse’s $4.5 trillion balance sheet. The Fed’s balance sheet is made up of securities such as Treasuries (bonds) and mortgage-backed securities, the balance sheet was increased during the 2008 financial crisis. As the Fed built up a store of these assets.

The Federal Reserve like all the major central banks has a useful trick which is creating money out of nothing. Banks create securities which they sell to central banks and this is what is known as quantitative easing (printing money). Over the years following 2008 crisis, the Fed has continuously reinvested the principal of the securities it holds. To learn more about how the Federal Reserve works then you can find a good book here on Amazon.

However, the Fed now wants to unwind the bond buying program, so when the current bonds that the Federal Reserve holds matures, they will not reinvest the money back into buying more bonds. This process will be done slowly and only when certain conditions are met, to read the official Fed report click here.

Federal Reserve Balance Sheet - econ alerts

And in the UK

After the UK election that backfired on Theresa May, the Conservatives have now taken a softer tone on the Brexit situation. Philip Hammond has been quoted saying that the UK “should prioritise protecting jobs, protecting economic growth and protecting prosperity”. And also the UK should take a “pragmatic” approach to the upcoming EU negotiations. This is a far different approach from the “bloody difficult woman”, and the “Brexit means Brexit” stance that Theresa May was taking pre-election.

The result of the election may serve as a wake-up call to Theresa May that her approach to Brexit was unhelpful to the whole of the UK. As she refused to allow the devolved governments a say on the matter of Brexit, and most of all there was a lack of clarity in terms what type of deal the UK was seeking with the EU.

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Pi De Jonge | Econ-Alerts


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