The FED is preparing a $1 Trillion in QE for the next Recession: Deutsche Bank

While in recent weeks there has been a material increase in Fed balance sheet normalization chatter, according to a new report from Deutsche Bank analysts, it may all be for nothing for one simple reason: should the US encounter a recession in the next several years, the most likely reaction by the Fed would be another $1 trillion in QE, delaying indefinitely any expectations for a return to a “normal” balance sheet.

That observation has prompted speculation that at some point in the next several years, the US economy will finally succumb to what historically has been a contraction in output, aka a recession. The question, then, is how would the Fed responds. The answer, according to a Deutsche Bank analysis of the future shape of the Fed’s balance sheet, is with another a $1 trillion liquidity injection, which would stop dead in its tracks any plans for a Fed balance sheet renormalization.

As the DB’s Matthew Luzzetti writes in his analysis, to this point, the economic backdrop considered is relatively optimistic: the economy is assumed to not enter a recession over the next eight years and the Fed is able to normalize the fed funds rate in line with their expectations. However, given that the current expansion is already well advanced, it is possible that the economy enters a recession before the Fed’s balance sheet normalizes.


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