Tag : Withdrawn

London: The worlds most influential central banks -- apart from the Bank of Japan -- are steadily reducing the size of their balance sheets, and no one knows for sure what will happen as more and more liquidity is withdrawn from the financial system. Since inflation hit its highest level in a generation last year, central banks have embarked on the quest -- unprecedented in scale -- of shrinking their bloated balance sheets by selling securities or letting them mature and disappear from their books, CNN reported. "Quantitative tightening," or QT, by top central banks will suck $2 trillion in liquidity out of the financial system over the next two years, according to a recent analysis by Fitch Ratings. A liquidity drain of that magnitude could amplify strains on the banking system and markets, which are already grappling with a sharp run-up in interest rates and edgy investors. "There are concerns we are in uncharted territory," said Raghuram Rajan, the former governor of the Reserve Bank of India (RBI), who presented a paper on these risks at last year's gathering of central bankers in Jackson Hole, Wyoming. He noted that "unintended consequences" were likely as QT continued, CNN reported. Between 2009 and 2022, purchases of long-dated government bonds and assets such as mortgage-backed securities by the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan totaled an eye-watering $19.7 trillion, according to Fitch. In 2017, Janet Yellen compared QT to "watching paint dry," describing the process as "something that runs quietly in the background". Rajan, now a professor of finance at the University of Chicago, disagrees. Investors and banks calibrate their strategies to the amount of money ...