"The
Federal Reserve can keep their balance sheet at the current size (and keep the
risk asset party going) or it can position itself to be able to hike
rates — but it cannot do both."
"It’s
often mentioned that the Fed buys bonds in asset swaps. This is true. Where
many people get confused is that it is not an asset swap for the banks. When
the Fed buys bonds, they typically buy them from non-banks. The bonds are
removed from circulation and put on the Fed’s balance sheet, while the Fed pays
for these bonds with newly created reserves. Now these reserves must be
deposited at a bank, so they will show up at a bank as new deposits."
