June 25, 2022

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Fed prepares to slash size of swollen balance sheet by $95bn a month

2 min read

The Federal Reserve is set to start shedding up to $95bn of assets a month from its swollen $9tn balance sheet as it steps up efforts to curb soaring inflation in the US.

An account of the Federal Open Market Committee’s last meeting in March showed officials finalising a plan to reduce the central bank’s presence in US government bond markets, a process that will begin as early as next month.

The Fed’s footprint in debt markets expanded significantly during the pandemic as it hoovered up trillions of dollars of Treasuries and agency mortgage-backed securities in an attempt to stave off an economic cataclysm.

But faced with persistently high inflation, the Fed is now trying to tighten monetary policy, and reducing the size of its balance sheet is the main lever it can pull to cool down the US economy after raising interest rates.

According to the minutes of the March meeting, officials broadly support the Fed increasing the pace at which it pares back its asset holdings over the coming months via a process known as “run-off”, whereby the central bank stops reinvesting proceeds from maturing securities.

Members of the FOMC broadly agreed on monthly caps of about $60bn for Treasuries and $35bn for agency MBS, phased in over a period of three months or “modestly longer if market conditions warrant”. That amounts to asset reductions of just less than $1tn a year.

“The Fed has clearly recognised at this point that they are behind the curve,” said Eric Winograd, an economist at AllianceBernstein.

Winograd added: “When you’re behind the curve you have to hurry to catch up. They are now hurrying . . . They were increasing the size of the balance sheet four weeks ago. And now four weeks from now they are going to be reducing it.” 

Markets reacted modestly to the minutes, as the S&P 500 stock index declined about 1 per cent and the yield on the 10-year Treasury note rose by 0.06 percentage points to 2.61 per cent.

Meanwhile, the minutes…

2022-04-06 15:04:05

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