In a much-awaited move, on Dec. 16, the Federal Reserve ended an unprecedented seven-year experiment with keeping its target short-term interest rate between zero and 0.25 percent. Despite all the hullaballoo, this move was the non-event of 2015.
Now, the Fed faces at least two big challenges in unwinding its balance sheet. First, as it began large-scale purchases of assets, and also paying interest on reserves, those reserves skyrocketed to more than $2.5 trillion (from pre-crisis levels of around $10 billion—see chart). This jump by a factor of 250 was a simple response to the fact that banks could earn, risk-free, more from the Fed than by lending to other banks or from other safe assets.