At the January FOMC meeting, the Fed announced that it is keen to “significantly” shrink the size of its balance sheet, which will “commence after the process of increasing the target range for the federal funds rate has begun.” Chairman Powell hinted that this implies the back end of this year. The last time the Fed tried to reduce the size of its balance sheet—from October 2017 through to September 2019—it ended with chaos in the repo market and volatility across other financial markets. As a result, the Fed was forced to restart QE to inject reserves back into the system. In this Economics Weekly, we examine what could happen this time around.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.