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Analysts at Deutsche Bank think the Federal Reserve’s balance sheet may expand to over $20 trillion in less than a decade as the central bank may need to add up to $12 trillion to reach what is equivalent to a shadow Fed Funds rate of -5%, as noted by popular analyst Holger Zschaepitz. 

Economists typically use the Fed funds rate. However, that rate was pushed to near-zero levels in the first quarter to counter the coronavirus slowdown. As such, monetary policy entered the zone termed the “zero lower bound” and the fed funds rate has stopped working in models. 

Therefore, the focus is on the shadow fed funds rate that can go negative, reflecting the US central bank’s additional easing. The shadow rate has been developed by Chicago Booth’s Jing Cynthia Wu and Fan Dora Xia.

The Fed has made it clear time and again that it is not in favor of pushing the official Fed funds rate below zero. However, it can keep buying bonds and other assets for a long time, pushing the shadow rate into the negative. 

The central bank has expanded its balance sheet by over $3 trillion in the last four months, lifting inflation expectations and gold prices. The yellow metal surpassed the previous lifetime high of $1,921 reached in September 2011 and is now trading at $1,960 per ounce.