Question

A couple of years back when she still ran the Fed, then chairwoman, Janet Yellin, indicated before the Senate Banking Committee that the Fed would continue raising short term interest rates, and start shrinking its 4.5 trillion portfolios “very soon.” In essence, reversing Quantitative Easing. Since then what has happened to interest rates for both short and long term loans? Also, what has been current Fed chairman Jerome Powell's approach to short term interest rates: expansionary or restrictive monetary policy?

Answer 1

The short term effect of reverse quantitative easing is that we know the bond prices fall and this in turn raise the interest rates. Therefore interest rates for short term loans increase. In the case of long term loans, the loan seekers are discouraged to take loans from the banks due to the increased interest rates and uncertainty of repayment really mounts on them.

As we can see the short term interest rates are increased, Jerome Powell's approach is to deploy a contractionary monetary policy which will reduce the money supply in the market owing to the higher interest rates and seen as a measure to curb inflation which is present in the economy.

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