For the past few years – since 2017 – the Fed has engaged in quantitative tightening, or Q.T., a process which involves shrinking the holdings of government-backed securities on its balance sheet. While the tightening has not inhibited economic growth, it has left financial markets vulnerable in an important way. For context, earlier this year, Fed officials decided to continue setting their main rate using an “ample reserves” system – one in which banks have extra cash deposits at the central bank. In order to create the excess in reserves, the Fed needed to hold a lot of bonds. However, with Q.T. it was unclear how many reserves needed to remain in the system, leading to a dollar shortage. This required the Fed to supply cash to the market for the first time since the financial crisis, though the consequences of this may be short lived. Possible solutions to this problem were outlined in the following article from the New York Times.
Read more via the New York Times.