When and How To Exit Quantitative Easing?

S ince the onset of the financial crisis in late 2007, the Federal Reserve has injected an astronomical amount of money into the economy through its large-scale asset purchase (LSAP) programs. According to former Fed Chairman Ben Bernanke (2009, p. 5), the essence of LSAP is “credit easing” (CE)—that is, reducing the cost of private borrowing by direct purchases of privately issued debt instead of government debt. However, given that the government has no intention to hold private debt on its balance sheet forever, at some point the Fed must sell it. The goal of this article is to answer the following questions about the likely effects of the Fed’s exit strategies: