Central banks continue to shrink their balance sheets

The article examines quantitative easing (QE) by central banks and its gradual unwinding.

Since the financial crisis of 2008, the ECB and the Fed have expanded their balance sheets by purchasing bonds to lower interest rates and stimulate the economy. Since 2022, balance sheets have been contracting due to high inflation. Research evidence shows that QE has lowered long-term interest rates and raised asset values — in Finland particularly property values, which has increased net wealth at both ends of the wealth distribution.

The effects of balance sheet reduction are presumably more modest than stimulus, as it takes place slowly and predictably. In addition, the need to reduce interest rate risk is driving the reduction: central banks are now paying higher deposit rates while receiving income from long-term bonds purchased at previously low interest rates. (AI translation)

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