FocusEconomics: How Will the Fed Reduce Its Balance Sheet & How Will the ECB End QE? - 18 Economic Experts Weigh In

Link to the article above

I was one of the economists asked by FocusEconomics about where the Fed and European Central Bank are headed with QE. Here are the answers I contributed:

1. How do you think the Fed will unwind its multi-trillion dollar balance sheet resulting from its stimulus program without severely upsetting the bond and equity markets?

I expect the Fed to reduce reinvestment in mortgage-backed securities more, and possibly earlier, than they reduce reinvestment in long-term US Treasury bonds. The reduction in reinvestment will probably happen gradually, not all at once. There will be a pause in rate increases after the first announcement of reduction in reinvestment, both to compensate and for assessment.  

2. How will the ECB, which is still stuck in a quantitative easing cycle, be able to bring it to an end without plunging Eurozone countries into yet another financial crisis?

I think the ECB will move very slowly to cut back on its stimulus.

The key for avoiding another financial crisis is to keep raising effective capital requirements. If Trump appointees want to weaken or slow down the tightening of capital requirements, the key thing to watch is if European officials distance themselves from the US, saying they want tighter requirements than the US wants, or if they simply go along with a lean towards less strict capital requirements by the US.