credit at reasonable borrowing rates. the federal reserve ’ s liquidity facilities and asset purchase programs have led to a substantial expansion of the federal reserve ’ s balance sheet since september 2008. currently, the fed ’ s balance sheet totals about $ 2. 2 trillion, up from about $ 900 billion last fall prior to lehman ’ s failure. in thinking about this balance sheet expansion, i would make three broad points. first, in my mind, the goal is not the expansion of the balance sheet per se, but the objectives that i laid out earlier. in this respect, the expansion of the balance sheet differs considerably from japan ’ s experience with quantitative easing. in the current circumstance, the federal reserve ’ s liquidity programs act on the asset side of the balance sheet as the fed lends funds against less liquid collateral and expands its asset holdings via purchases of agency debt, agency mbs and treasuries. the goals are to slow down the pace of deleveraging to reduce the risk of catastrophic failure, improve market function and ease financial market conditions. in contrast, the bank of japan worked on the liability side of the balance. their goal was to expand the amount of excess reserves held by the banking system so that the banks would be more willing to expand their credit provisions. although the fed ’ s activities have led to a big jump in excess reserves, this increase is incidental – a byproduct rather than goal of the asset - oriented programs. second, as a consequence of this my point, the size of the balance sheet, is not a good metric for measuring the impact of the fed ’ s facilities or the amount of stimulus that the fed is providing via these programs. for example, consider the impact of the fed facilities on rollover risk. a fed facility that eliminates rollover risk might not be used at all. there might be no balance sheet impact. nevertheless, the facility could have an important impact on market function and financial market conditions. it is not possible to mechanically map the size of the balance sheet back onto the impact on financial market conditions. that is because the balance sheet size is being driven by a large number of different actions. is a dollar of taf lending equivalent to a dollar extended through the cpff or to a dollar of treasury purchases? how important is the pdcf? it backstops lots of lending, but outstanding amounts are very low. the differences between the various programs and activities mean that the balance sheet size should be interpreted in

policy action embedded in derivatives like the forward rate agreements, or fras, moved in sympathy, with the fra curve quickly pricing in not just an earlier but also a speedier pace of interest rate hikes by the reserve bank. part of this selloff probably represented more a re - pricing of risk at longer maturities – i. e. a higher “ term premium ” – rather than changes in actual expectations of future policy rates. it was indeed striking to see how strong the correlation had become, during the taper tantrum episode, between the longer ends of government yield curves in south africa and the united states, and this, despite the meaningful differences in economic and policy fundamentals between the two countries. the depth of domestic capital markets, which were able to absorb significant net sales of sa bonds by non - residents ( r68 billion from the beginning of may 2013 up to the end of last week, according to jse data ) also played a part. the renewed reduction in that “ term premium ” in major fixed - income markets in 2014, as policy guidance by the federal reserve seemed to reduce investors ’ uncertainties as to the future path of us rates, probably was a key factor towards the renewed decline in south african bis central bankers ’ speeches yields and the relative stabilisation in the rand since the end of january up until august 1. certainly, in terms of communication, central banks have progressed somewhat over the past couple of years, and particularly since the taper tantrum, the associated volatility in financial markets related to monetary policy communication, has also declined. the big question remains, however, how sustainable is the recovery that we are currently experiencing? or are we at risk, when us policy rates finally rise in 2015, assuming the median projections of both fomc members and market participants prove to be correct, of a repeat of the market snapback that we witnessed in 2013? it is not possible to answer this question with a great degree of confidence, for even if we assume that us policy tightening is largely “ priced ” into markets, the potential for a renewed rise in risk premiums exists, especially in light of the current low levels of implied volatility in a broad range of markets. nevertheless, several factors could usher in a different scenario from that of the “ taper tantrum ”. admittedly, the more the us economy continues on its “ healing ” path following the shock of the 2008 – 09 global financial crisis, the more eventual policy normal