In this news title on Zatrun.com, The Federal Reserve’s balance sheet expansion, which had surged from 4 trillion dollars to nearly 9 trillion dollars by the beginning of 2022, has reversed course. However, the recent downturn is not the first, as the balance sheet had fallen to 8.3 trillion dollars in the first week of March.
This time, the decline followed a rise due to bank failures, once again pushing the balance sheet downward. According to the latest report on April 18th, the bank’s balance sheet is now at 8.6 trillion dollars. The ongoing shrinking trend of the balance sheet signals the Fed’s commitment to stabilize the financial system and avoid economic imbalances.
Federal Reserve’s Balance Sheet Reduction: What Does It Mean?
The recent decrease in the Federal Reserve’s balance sheet indicates its intention to withdraw money from the financial system. When the Fed embarks on monetary expansion, it increases spending, while it decreases demand during monetary tightening. The reduction in the balance sheet is the result of economic conditions and policy objectives. This is generally viewed as part of the normalization of the Fed’s monetary policy.
It is worth noting that the balance sheet losses do not affect the Fed like a commercial bank. The Fed is exempt from default or bankruptcy since it has the ability to create reserves to compensate for any potential losses.
New York Fed Report Indicates Balance Sheet Reduction Will Continue for Several Years
According to a recent report by the New York branch of the Federal Reserve, the central bank is moving ahead with its plan to reduce its massive cash and bond holdings over the next few years, which will likely result in negative net income for a few more years.
As part of the System Open Market Account’s annual report for 2022, the bank had previously announced that the nearly $8.7 trillion in Fed assets would drop to around $6 trillion by the middle of 2025, before remaining fixed for about a year. The assets are then expected to increase to maintain balance with the economy’s growth, reaching $7.2 trillion by 2030.
This suggests that the Fed’s balance sheet reduction will be a long-term effort, with the central bank taking measured steps to restore the balance of its assets over time.