The Federal Reserve and the European Central Bank may mop up as much as 90% of the money they pumped into banks over the last decade now that high inflation and interest rates make that extra liquidity unnecessary, a paper by a Fed economist showed on Thursday.
some of their massive bond purchases, which flooded banks with cash when price growth was sluggish and borrowing costs already at zero.
Its author, a senior adviser to the Federal Reserve Board, estimates the Fed could reduce total reserves from their current $6 trillion to between $600 billion and $3.3 trillion depending on whether it would accept U.S. government bonds or less coveted assets in return. Similarly, the ECB could shrink its own provision of liquidity from 4.1 trillion euros at present to as little as 521 billion euros, if it only accepts German government bonds, or 1.4 trillion euros against other assets.
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