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The general consensus is the Federal Reserve has no way of winding down QE. I disagree. It’s easy to say the Federal Reserve has no way of exiting QE, it’s more difficult to think of possible scenarios in how the FED may exit. One major idea is for the FED to let its portfolio mature. I think there is another interesting FED exit plan that has been rarely discussed.

What if the Federal Reserve’s exit plan was Reverse Repo? The FED could use the recently acquired “high quality collateral” to lend to banks via the recently setup Tri-party repo arrangement. The banks could post cash as collateral. This would effectively drain excess reserves from the banks. A maneuver like this from the FED would seem to create higher Repo rates which is what we have been experiencing ever since May when the FED began to hint of tapering.

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