<p>The unwind depends upon what the central bank did.</p>

<ul>
<li>If the central bank did a repurchase agreement (“repo”) or lent against assets for a fixed time, the agreement automatically unwinds at the term of the deal (which is short). They would need to enter into new deals to keep their balance sheet size unchanged.</li>
<li>If they bought the asset outright, it will either mature, or the central bank can sell ahead of maturity.</li>
</ul>

<p>There are no “charging a premium” involved; the cost of the operation is embedded in the lending cost (or purchase/sales price of an asset).</p>

<p>There was a very large debate about unwinding central bank balance sheets in the 2010-2016 (?) period. The Fed was eventually able to slowly reduce the size of its balance sheet in the last cycle, and there is no reason to believe that this time is different. There is no sign that an “unwind” was necessary, nor are the effects of unwinding a deep concern.</p>

CC BY-SA 4.0
2020-04-07T16:28:22.363Z
+1 though there is also no reason to believe this time is the same, as the liquidity/solvency issues seem to be different based on lockdown rather than overleveraging.  The 2013 "temper tantrum" suggested that markets were overly sensitive to Fed behavior, and could be again.
Henry
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2020-04-07T16:37:39.237Z
As an answer to "[c]an a position of this size (60% of national output) actually be unwound", "[t]he Fed was eventually able to slowly run down its balance sheet in the last cycle" is slightly misleading as they weren't able to make any serious progress: they went from around \$4.4 trillion to \$3.7 trillion (https://fred.stlouisfed.org/series/WALCL).
Kent Shikama
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2020-04-07T17:22:05.470Z
There’s no actual evidence that “unwinding” is even necessary, nor is there much evidence it mattered.
Brian Romanchuk
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2020-04-07T17:32:14.493Z
@KentShikama: I've seen economists talk (I'll add link once I find it again--it was one of the many Voxeu CEPR articles IIRC) that "this time will be different" in the sense that once people return from the lockdown en-masse [assuming that happens], there will be a spending surge, which is worrisome inflation wise. But it was "just talk" not an actual model. Found it "More circular spending with less circular production can lead to inflation." https://voxeu.org/article/supply-side-matters-guns-versus-butter-covid-style
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-07T17:36:59.533Z
And "Cutting back on output with containment policies while boosting spending with stimulus packages is likely to be inflationary. That’s not all bad in these deflationary times, but it could get out of hand – as it did in the 1970s."
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-07T17:41:25.287Z
@KentShikama And more recently https://voxeu.org/article/will-inflation-make-comeback-after-crisis-ends "Might inflation rise as a result of policies undertaken during the current crisis and as demand comes back more strongly than supply when it ends? This column argues that it is possible, but far from clear. Indeed, there are reasons to doubt whether any rise in inflation will come. Looking back at past crises – and in particular wars – reveals some similarities but more differences with the current pandemic."
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-07T18:39:12.027Z
The reason why the Fed’s balance sheet was unwound slowly was because inflation was *below target*. If inflation rise, there’s no issue with unwinding it faster. We also run into the issue that there is no a lot of evidence that QE had any effect on the real economy or inflation.
Brian Romanchuk
CC BY-SA 4.0
2020-04-07T14:25:10.007Z
2020-04-07T17:20:50.090Z
2020-04-07T17:20:50.090Z
Brian Romanchuk
<p>On Monday, 06 April, 2020 the Financial Times reported that the Federal Reserve balance sheet could increase to <a href="https://www.ft.com/content/ec10b41a-84af-4e44-ad3f-5bb86b6e1eaa" rel="nofollow noreferrer">$9 trillio</a>n.  This is partly due to the myriad of initiatives, some new, to protect the economy of the United States during the 2020 Coronavirus Pandemic.  </p>

<p>A lot of online commentary is alarmist and centres on the threat of hyperinflation and many of the news articles don't inform the reader <em>how the Federal Reserve purchases assets.</em>. This puts the average citizen at a disadvantage when understanding the economic impact.  </p>

<p>My question is multi-faceted (but singlular) and aiming to focus purely on the economics.</p>

<ul>
<li>How does the Federal Reserve unwind the positions on their books?  Do financial services have to purchase the assets back at a later date and does the Federal Reserve charge a premium for the service?</li>
<li>Can a position of this size (60% of national output) actually be unwound?</li>
</ul>

<p>If this question is similar to the approaches of other Central Banks then please tag accordingly if appropriate.  </p>

CC BY-SA 4.0
2020-04-07T16:24:24.407Z
This is not a new policy tool. The Fed did the same thing during the Great Recession and we had low, stable inflation throughout. There isn't a good reason to expect hyperinflation now.
123
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2020-04-07T17:13:57.090Z
Re: "online commentary is alarmist and centres on the threat of hyperinflation". Indeed. To note just one question here (there were more): https://economics.stackexchange.com/questions/34656/what-amount-of-quantitative-easing-will-cause-hyperinflation (I've tagged your question with QE since there's no QT tag here for now.)
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-07T17:20:04.730Z
Re: "Can a position of this size (60% of national output) actually be unwound?" The real question (if inflation is your target/worry) is not "can" but "does it have to" and  "in what time frame does it have to". The BoJ has slightly over 100% of Japan's GDP on their sheet. (See my answer to the linked question for a graph/ref.)
fantastic peace and prosperity
<inflation><central-banking><federal-reserve><quantitative-easing>
How does the Federal Reserve unwind the asset purchasing scheme announced in response to the 2020 Coronavirus Pandemic?
Venture2099
# How does the Federal Reserve unwind the asset purchasing scheme announced in response to the 2020 Coronavirus Pandemic?

(Asked by: username_0 on 2020-04-07)

On Monday, 06 April, 2020 the Financial Times reported that the Federal Reserve balance sheet could increase to [$9 trillio](https://www.ft.com/content/ec10b41a-84af-4e44-ad3f-5bb86b6e1eaa)n. This is partly due to the myriad of initiatives, some new, to protect the economy of the United States during the 2020 Coronavirus Pandemic.

A lot of online commentary is alarmist and centres on the threat of hyperinflation and many of the news articles don't inform the reader *how the Federal Reserve purchases assets.*. This puts the average citizen at a disadvantage when understanding the economic impact.

My question is multi-faceted (but singlular) and aiming to focus purely on the economics.

* How does the Federal Reserve unwind the positions on their books? Do financial services have to purchase the assets back at a later date and does the Federal Reserve charge a premium for the service?
* Can a position of this size (60% of national output) actually be unwound?

If this question is similar to the approaches of other Central Banks then please tag accordingly if appropriate.

**Tags:** inflation, central-banking, federal-reserve, quantitative-easing

> **Comments:**
> **username_1**: This is not a new policy tool. The Fed did the same thing during the Great Recession and we had low, stable inflation throughout. There isn't a good reason to expect hyperinflation now.  
> **username_2**: Re: "online commentary is alarmist and centres on the threat of hyperinflation". Indeed. To note just one question here (there were more): https://economics.stackexchange.com/questions/34656/what-amount-of-quantitative-easing-will-cause-hyperinflation (I've tagged your question with QE since there's no QT tag here for now.)  
> **username_2**: Re: "Can a position of this size (60% of national output) actually be unwound?" The real question (if inflation is your target/worry) is not "can" but "does it have to" and  "in what time frame does it have to". The BoJ has slightly over 100% of Japan's GDP on their sheet. (See my answer to the linked question for a graph/ref.)  

---

## 1 answers

### Answer by username_3 on 2020-04-07. Score: 5 | Accepted answer

The unwind depends upon what the central bank did.

* If the central bank did a repurchase agreement (“repo”) or lent against assets for a fixed time, the agreement automatically unwinds at the term of the deal (which is short). They would need to enter into new deals to keep their balance sheet size unchanged.
* If they bought the asset outright, it will either mature, or the central bank can sell ahead of maturity.

There are no “charging a premium” involved; the cost of the operation is embedded in the lending cost (or purchase/sales price of an asset).

There was a very large debate about unwinding central bank balance sheets in the 2010-2016 (?) period. The Fed was eventually able to slowly reduce the size of its balance sheet in the last cycle, and there is no reason to believe that this time is different. There is no sign that an “unwind” was necessary, nor are the effects of unwinding a deep concern.

> **Comments:**
> **username_4**: +1 though there is also no reason to believe this time is the same, as the liquidity/solvency issues seem to be different based on lockdown rather than overleveraging.  The 2013 "temper tantrum" suggested that markets were overly sensitive to Fed behavior, and could be again.  
> **username_5**: As an answer to "[c]an a position of this size (60% of national output) actually be unwound", "[t]he Fed was eventually able to slowly run down its balance sheet in the last cycle" is slightly misleading as they weren't able to make any serious progress: they went from around \$4.4 trillion to \$3.7 trillion (https://fred.stlouisfed.org/series/WALCL).  
> **username_3**: There’s no actual evidence that “unwinding” is even necessary, nor is there much evidence it mattered.  
> **username_2**: @KentShikama: I've seen economists talk (I'll add link once I find it again--it was one of the many Voxeu CEPR articles IIRC) that "this time will be different" in the sense that once people return from the lockdown en-masse [assuming that happens], there will be a spending surge, which is worrisome inflation wise. But it was "just talk" not an actual model. Found it "More circular spending with less circular production can lead to inflation." https://voxeu.org/article/supply-side-matters-guns-versus-butter-covid-style  
> **username_2**: And "Cutting back on output with containment policies while boosting spending with stimulus packages is likely to be inflationary. That’s not all bad in these deflationary times, but it could get out of hand – as it did in the 1970s."  
> **username_2**: @KentShikama And more recently https://voxeu.org/article/will-inflation-make-comeback-after-crisis-ends "Might inflation rise as a result of policies undertaken during the current crisis and as demand comes back more strongly than supply when it ends? This column argues that it is possible, but far from clear. Indeed, there are reasons to doubt whether any rise in inflation will come. Looking back at past crises – and in particular wars – reveals some similarities but more differences with the current pandemic."  
> **username_3**: The reason why the Fed’s balance sheet was unwound slowly was because inflation was *below target*. If inflation rise, there’s no issue with unwinding it faster. We also run into the issue that there is no a lot of evidence that QE had any effect on the real economy or inflation.  

---

