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No, it’s not QE again, at least not yet.

Fed balance sheet trends released last week raised questions about whether the Fed has quietly begun quantitative easing. This comes as total Fed assets which have been on a slide since the bank announced its program of quantitative tightening last year, spiked by almost $300bn last week. It is important to note that not all expansion of the balance sheet is quantitative easing. A quantitative easing occurs when a central bank engages in a deliberate policy to influence banks to create more money usually by acquiring banks’ long-term securities. The recent increase in the Fed balance sheet was mostly on the short end of the curve as banks shored up their balance sheets after the collapse of SVB and Signature. This is something that Central banks do when there is a stress in the banking system.

However, the subsequent tightening of credit conditions may be a trigger for the slowdown in aggregate demand, which central banks have in all fairness failed to accomplish with their quantitative tightening so far. Should that be the case, inflation outlook will be boosted, but the economy will suffer, which will adversely affect employment. Depending on the severity of the crisis, central banks may eventually have to ease monetary conditions. Stagflation risk, which we downgraded this year, is resurrected under this scenario.

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