At Jackson Hole, Federal Reserve officials heard a pessimistic view of the benefits of quantitative easing and their ability to cut back the Fed's huge balance
sheet in a smooth way. In a paper presented Saturday at the annual retreat in Jackson Hole, Wyoming, Viral Acharya and his co-authors wrote, "Shrinking the
central bank's balance sheet is not likely to be a completely good thing." "Our work suggests that the pros and cons of quantitative easing should be carefully
thought about again." Quantitative easing, or QE, is the name for the huge bond-buying programmes that the Fed started during the financial crisis of 2008 and then started up
again in 2020 as the pandemic spread. Raghuram Rajan of the University of Chicago was one of the co-authors of the paper.
It was a warning to US policymakers, who have started a process called "quantitative tightening" to reduce their balance sheets even as they raise interest rates to slow down inflation.
The paper looked at what happened to requests for liquidity from commercial banks during QE and whether
or not these requests went down when the balance sheet went down. It found that the claims went up a lot during QT and didn't go down as much.
This meant that there was less money in the system than the level of reserves would suggest
This could affect how stable the financial system is in times of stress in the future.