by Paul Mueller
The American Institute for Economic Research
Pay no attention to the balance sheet behind the curtain.
In the wake of the recent FOMC meeting, few people are talking about the Fed’s balance sheet. While the FOMC took no action on their interest-rate target, they enacted a significant change to their quantitative tightening policy. This change tells us that the Fed is quite happy with the new normal of providing massive liquidity to markets with very little accountability.
Fed officials began its quantitative tightening in August 2022 to help bring inflation down, allowing maturing securities to “roll-off” the balance sheet rather than be reinvested. They capped the monthly roll-off of agency debt and mortgage-backed securities (MBS) at $35 billion and the monthly roll-off of Treasury securities at $60 billion. This meant the balance sheet could decline by up to $95 billion per month.