Size matters, and Federal Reserve’s balance sheet is not as big as shrill critics of QE3 would lead you to believe.
True, $3 trillion is serious money. It represents a tripling in the size of the Fed’s balance sheet since 2008, before the U.S. central bank unleashed the first round of its aggressive campaign of so-called quantitative easing. It is now on round three, and has committed to keep buying bonds until it spies a substantial improvement in the outlook for the labor market.
But as a percentage of GDP (gross domestic product), the Fed’s balance sheet is still smaller than those of the Bank of Japan, European Central Bank, and Bank of England, notching under 20 percent of GDP compared with over 30 percent of GDP for both the BOJ and ECB.
Jim Bullard, president of the St. Louis Federal Reserve, made this point during a presentation at Mississippi State University on Wednesday. The graph on page 32 of his slideshow tells the tale.
Bullard was more cagey on whether it mattered that the Fed’s balance sheet was smaller than several other major central banks. He said the size of the balance sheet could still hinder a “graceful exit” from the Fed’ extraordinary efforts to spur growth, while the value of the assets on its books would fall as interest rates rise. However, if investors decide to really start worrying about central bank balance