The Federal Reserve’s balance sheet saw a slight increase this week, providing stability to monetary conditions and keeping the money supply steady. As of the week ending Dec. 13, the central bank’s adjusted assets totaled $7.74 trillion. This level matches the previous week’s figures and represents a 9.83% decrease from the same time last year.
Shrinking the balance sheet has been a priority for the Fed, which has been implementing quantitative tightening measures. Under this initiative, securities are allowed to mature and roll off, rather than being reinvested. The current round of quantitative tightening, known as QT, began in June 2022, running concurrently with the bank’s rate-hike cycle.
Since last spring, the size of the balance sheet has significantly reduced from nearly $9 trillion. However, it remains considerably higher than the pre-pandemic level of around $4 trillion when the Fed started purchasing securities to support the economy during the Covid-19 crisis.
The Future of the Central Bank’s Quantitative Tightening
Some economists anticipate that the central bank will modify or completely halt its process of Quantitative Tightening (QT) in the early part of the following year, as officials approach a reduction in interest rates. The rationale behind this expectation is that if the Federal Reserve is aiming to loosen its monetary policy through rate cuts, it would not want to simultaneously tighten policy through QT. However, during a recent press conference, Fed Chairman Jerome Powell stated that adjusting the pace of QT was not currently being considered. Powell emphasized that balance-sheet tightening and the rate-hike cycle are operating independently, implying that QT could continue even as the rate target is being lowered.
The decision on whether to continue with QT will ultimately depend on whether the Fed is reducing rates to return them to normal levels or because the economy is experiencing weakness. Powell highlighted the importance of understanding the reasoning behind rate cuts in order to determine whether it would be suitable to implement both actions simultaneously.
It remains to be seen how the central bank will navigate these choices and whether it will prioritize the normalization of interest rates or respond to economic uncertainties.