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With inflation rising in the US, economists from monetary policy analysis and forecasting firm LH Meyer say the US central bank may stop shrinking its balance sheet earlier than expected. However, critics have said that the US central bank has not actually shrunk the Fed’s balance sheet at all, and the entity has been accused of perpetuating the practice of quantitative easing (QE) by continuing to buy long-term securities from the market.
US monetary policymakers are up in arms over the economy’s inflationary pressures and the current debate over the technical definition of a recession. Analysts suspect that the Federal Reserve will raise the federal funds rate by at least 75 to upwards of 100 basis points (bps) at its next meeting.
In addition to the rate hikes, the Fed said last year that it would reduce its balance sheet by $8.5 trillion by June 1. The central bank said at the time that it would slowly stop buying mortgage-backed securities (MBS) and maturing government bonds.
As the war in Ukraine continues and inflation rose to its fastest pace in more than 40 years last month, many economists believe the US Federal Reserve has a lot of work to do on monetary tightening. The former economic adviser to ex-President Barack Obama, Larry Summers, recently mentioned that the Fed has a problem to deal with.
Speaking about a recession, Summers insisted that things will depend on “how skilled they are [Federal Reserve] turns out to be… They have a very, very difficult balance sheet problem in terms of setting monetary policy, given the situation we’re in.”
The latest US Consumer Price Index (CPI) report had shown that June reflected a 9.1% year-on-year increase. Inflation has led a number of people to suspect that the Fed will be a dove on the next two rate hikes and possibly halt the central bank’s QE tapering.
However, the Fed’s balance sheet reduction that was supposed to start in June has been contestedand many observers Think that The Fed still has QE. On the other hand, economists at forecasting firm LH Meyer say the Fed’s tapering “could stop early as recession risks increase,” according to a report published by the Wall Street Journal (WSJ).
The WSJ article describes recession risks could prompt the Fed to stop shrinking its balance sheet “sooner than expected,” according to the LH Meyer economists. The researchers at the firm predict that a recession is likely to take place in 2024. Furthermore, the report explains that it is possible that the US Federal Reserve may stop quantitative easing (QT) by next year.
When the WSJ shared the editors via Twitter many criticized the entire report, because they do not believe that the Fed has reduced its balance sheet. “It never started,” one person wrote. “The balance continues to grow, there was no reduction,” another person black.
In late June, the gold bug and economist Peter Schiff condemned the US Federal Reserve to continue the QE process. “The Fed’s balance sheet just expanded for the third week in a row in June,” Schiff said. “The $1.9 billion increase increased the size of the Fed’s balance sheet to $8.934 trillion. I wonder when the Fed will stop creating inflation by ending QE and actually start fighting it by starting QT.”
July 15, the writer and market maniac at Welt, Holger Zschaepitz, the Fed said “has already halted the shrinking of its balance sheet.” Zschaepitz added:
Total assets grew by $4 billion in the past week to $8.896tn. Fed balance now equal to 36.5% of [the] US GDP vs ECB’s 81.9% and BoJ’s 135%.
The Twitter account called Occupy the Fed Movement talked about the Fed continuing QE the day before Zschaepitz’s tweet. “FED BS Update: FED Increases Balance Sheet by $4B ($3.3B “Other Assets”) Same Week CPI Prints 9.1%,” Occupy the Fed wrote. “USTs up $1.1B and MBS flat despite supposed QT plans. FED clearly serious about fighting inflation,” the Twitter account added sarcastically.
For years, the Federal Reserve has been accused of bailing out the mega-banks and creating unnatural booms in the American and global economy. Since 2020, the Fed’s balance sheet is significantly larger than at any time in history, and the growth in the money supply since that year is quite difficult to understand.
What do you think of the recent WSJ report that says the Fed may stop shrinking its balance sheet? What do you think of the accusations that the US Federal Reserve has not shrunk its balance sheet much at all? Let us know what you think about this topic in the comments section below.
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