US interbank market may not recover from QE – Fed paper
Authors warn shrinking the Fed balance sheet might not be enough to revive the market
The interbank market in the US may not fully recover from the loss of trading caused by the flood of liquidity from quantitative easing, according to a working paper published by the Federal Reserve.
QE generated reserves that “far exceeded” what most banks required, leading to a sharp drop in interbank trading, say authors Kyungmin Kim, Antoine Martin and Ed Nosal. One might expect trading to resume as the Fed drains reserves through its asset sales, but that will not necessarily be the case
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