The graphic depicts the balance sheets of the Federal Reserve, Bank of England, European Central Bank and the Bank of Japan.
What will surprise many is that the Fed’s balance sheet has shrunk for nearly a year and, as a percentage of GDP, its balance sheet is not as large as the other major countries.
With the announcement of QE3+, the Federal Reserve’s balance sheet will expand. Despite the fall in the unemployment rate in September to below 8%, we continue to believe it is most probable that the FOMC replaces the long-end purchases being conducted under Operation Twist, which will be completed by year-end, with new outright purchases. We are assuming the Fed’s balance sheet will increase by roughly $1 trillion by the end of next 2013.
If every things else was held constant, the this would put the size of the Fed’s balance sheet as a percentage of GDP above the Bank of England, but still below the ECB and BOJ. However, it is also reasonable to expect the BOE to extend its gilt purchases, when the current program is completed next month. The BOJ expanded its asset purchases program and is likely to do so again next year, if not before. The ECB announced an sovereign bond purchase program (Outright Market Transactions), but is waiting for a formal request to trigger it.
In any event, it is reasonable to expect the balance sheets of these major central banks to expand in the months ahead.
What is your opinion about this, what do you expect?
