Written by Gunther Schnabl and Tom Bugdalle*
1. A Monetary Policy Turning Point in the United States?
For many years, the U.S. Federal Reserve, like the European Central Bank (ECB), conducted monetary policy through adjustments to key interest rates when bank liquidity was scarce. During the global financial crisis, however, this conventional monetary policy framework was replaced by unconventional monetary policy.
After policy rates had been cut to near zero, asset purchases—and thus changes in the size of the Fed’s balance sheet—became the primary monetary policy instrument. This unconventional policy influenced the economy and financial markets through changes in interest rates at the long end of the yield curve.
As a result of these asset purchases, the Fed’s balance sheet expanded dramatically. Despite the so-called quantitative tightening that began in 2022, the Fed’s balance sheet still amounts to USD 6.7 trillion (compared with EUR 6.2 trillion for the Eurosystem), significantly above its level before the turn of the millennium.
