All financial eyes will be on next week’s policy meeting of the Federal Open Market Committee (FOMC). The futures market is penciling in a quarter-point increase to the benchmark federal funds rate. But while all the focus among economists, investors, and market analysts is on interest rates, what about the Federal Reserve’s massive balance sheet?
Despite policymakers conveying to the public that they have taken a fast-and-furious approach to inflation-fighting monetary policy by raising the policy rate by 500 basis points since March 2022, they have yet to emulate this aggression regarding the enormous multitrillion-dollar balance sheet.
During the coronavirus pandemic, the balance sheet exploded 110 percent, hitting an April 2022 peak of $8.965 trillion. As part of its quantitative easing (QE) initiative, the Fed acquired trillions in Treasury securities, corporate bonds, and mortgage-backed securities. It had been on a gradual downward trend, with the institution allowing the bonds to mature. But the balance sheet spiked in the fallout of the banking turmoil this past spring, growing nearly $400 billion, to a seven-month high of $8.73 trillion. It took about five months, but the balance sheet finally slipped below $8.3 trillion, the level before the Silicon Valley Bank and Signature Bank failures….