Question

During the quantitative easing, the Fed had substantial trading in the MBS market. Please illustrate the effect on the balance sheets of the Fed and the banking system.

Answer 1

As part of the qauntitative easing, Federal Reserve would purchase $ 200 billion in Mortgage based securities over the next several months.As a result of the same, it would create $200 billion debt effect on Federal Bank's balance sheet.

This will hep bank taking these Mortgage based Securities off their balance sheet.By bringing these credit amounts in the economy, FED will facilitate easy cash flow in the economy. Bank issue these amounts at lower rate of interest and earn profit  from the transaction.