[fintstone]

I'm sorry...I thought that was what we were talking about. I guess I don't understand the question. How would you suggest we take the $4T off of the Fed's BSheet without increasing short term rates? Magic?

They are tied together (interest rates and Fed Balance sheet). As you rapidly reduce the Fed BSheet, you also rapidly reduce liquidity because banks have used those funds (bonds sold to Treasury) to meet stricter, post-recession reserve requirements (banks have less ability to lend). If you reduce liquidity...businesses cannot borrow to grow/expand and interest rates creep upwards (demand). Of course it should eventually be unwound a bit..maybe as far a the approx. $1T before the bank crisis, just not so fast. The resulting increase in short term rates would be very hard on the economy. The 4T is less dangerous that fixing it too fast. Just the .5T or so already drained had begun to have an impact (I was referring to earlier).