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Monday, November 29, 2021

Fed’s Balance Sheet is in the Trillions, Rate Cut Signals No Further Shrinking

The Fed is widely expected to reduce interest rates late this month. That probably means its campaign to shrink its balance sheet is over, leaving the central bank with trillions of dollars more than before the Y 2008 financial crisis.

Beginning a decade ago in a bid to fight the Great Recession, the Fed by Y 2015 accumulated as much as $4.5-T of debt, including US Treasuries and mortgage-backed securities.

When policy makers began unwinding the portfolio at the end of Y 2017, primary dealers expected them to get it down to around $3 or 3.5-T. But they will not make it, as even after almost 2 years of cutbacks, the balance sheet is at $3.8-T.

Given the shift this year to a rate-cut stance, it might look unusual for the Fed to keep selling assets.

A rate cut tends to stimulate the economy; shrinking the balance sheet in theory does the opposite.

President Trump Friday amped up pressure on the Fed along these lines, tweeting that it “must stop with the crazy quantitative tightening,” a phrase used in markets to refer to the balance-sheet reduction.

Fed Chairman Powell’s recent comments about Southside risks has cemented the case for the 1st rate cut in more than a decade. Fed funds futures are getting close to suggesting a half-point of easing at this month’s Fed meeting.

Have a terrific weekend.

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