Get Used to the Bloated Fed Balance Sheet: It’s Here to Stay
What the Fed’s Balance Sheet Means for the Economy
Jamie McGeever reports from Orlando, Florida, discussing the Federal Reserve’s massive balance sheet. Despite shedding $1 trillion, it’s unlikely to return to pre-pandemic or pre-2008 levels. This could mean structurally higher interest rates due to the trillions of dollars in assets permanently infused into the economy by the Fed.
The Fed’s Policy Framework and Market Impact
Since the Great Financial Crisis, the Fed has built up a $9 trillion balance sheet and raised rates at the fastest pace in 40 years during the pandemic. David Zervos of Jefferies believes that central banks will see the benefit of higher real rates and a larger balance sheet.
Future Rate Cuts and the End of Quantitative Tightening
The Fed is preparing for rate cuts and signaling the potential end of its ‘quantitative tightening’ program. It’s estimated that QT will cease with the Fed’s balance sheet still at least $7 trillion.
The Fed’s Expanding Balance Sheet and Its Market Presence
The Fed’s balance sheet currently stands at $7.76 trillion, 35% of GDP, down from its peak of $9 trillion or 41% of GDP. Investors are advised to get accustomed to the Fed’s permanent and powerful market presence.
Views on the Fed’s Balance Sheet and Market Liquidity
William Dudley and other experts believe that a large balance sheet is now a core feature of the central bank’s policymaking toolkit. On the other hand, some analysts argue that it’s the rate of change in market liquidity that affects investor behavior and asset prices.
The opinions expressed here are those of the author, a columnist for Reuters. (By Jamie McGeever; editing by Philippa Fletcher)
