With inflation rising sharply in the United States, economists at LH Meyer, a monetary policy analysis and forecasting firm, say the Federal Reserve may stop shrinking its balance sheet sooner than expected. The Federal Reserve may stop shrinking its balance sheet sooner than expected, economists at LH Meyer said. Critics, however, accuse the U.S. central bank of actually not shrinking the Fed’s balance sheet at all, and that the organization is sustaining its quantitative easing (QE) practices by continuing to buy long-term securities from the market.
Forecasting firm LH Meyer predicts the Fed will shrink its balance sheet sooner than expected, and the central bank’s contraction remains controversial
U.S. monetary policymakers are preoccupied with the current debate over inflationary pressures in the economy and the technical definition of a recession. Analysts expect the Federal Reserve to raise the federal funds rate by at least 75 to 100 basis points (bps) at its next meeting.
In addition to raising rates, the Fed said last year that it would reduce its balance sheet by $8.5 trillion by June 1 (21). The central bank said at the time that it would gradually halt purchases of mortgage-backed securities (MBS) and maturing government bonds.
As war continues in Ukraine and inflation rose at its highest pace in more than 40 years last month, many economists believe the U.S. central bank has a lot of work to do regarding its monetary tightening practices. Larry Summers, former economic advisor to former President Barack Obama, recently noted that the Fed has challenges to address.
When talking about the recession, Summers said that the situation “depends on how adept (the Federal Reserve) is … They have a very, very difficult balancing issue in setting monetary policy given the situation we are in.” He argued.
The latest U.S. Consumer Price Index (CPI) report showed that June reflected a 9.1% year-over-year increase. This inflation has led many to suspect that the Fed is dovish on the next two federal funds rate hikes and may halt the central bank’s QE reduction.
However, the Fed’s balance sheet contraction, which was supposed to begin in June, iscontested. But the Fed’s balance sheet reduction, which was supposed to begin in June, has been disputed, with many observers believing the Fedcontinued QE. Meanwhile, according to areportpublished by the Wall Street Journal (WSJ), economists at forecasting firm LH Meyer said the Fed’s contraction “may stop early as recession risks increase.”
The WSJ article details that recession risks could force the Fed to stop shrinking its balance sheet “sooner than expected,” according to economists at LH Meyer. The firm’s researchers predict that a recession is likely to occur in 2024. They also explain that the U.S. central bank may halt quantitative tightening (QT) by next year.
WSJ shared the editorial on Twitterandmany criticized the entire report, saying they did not believe the Fed had reduced its balance sheet. The WSJ editorial said, “Because we don’t think the Fed has reduced its balance sheet, we don’t think the Fed has reduced its balance sheet. Another respondedthat “the balance sheet continued to grow and there was no reduction.”
Critics claim the Fed’s QE program is working perfectly
At the end of June, gold bug and economist Peter Schiffaccused the U.S. central bank of continuing QE.” The Fed’s balance sheet just expanded for the third consecutive week in June,” Schiff said.” The $1.9 billion increase brings the size of the Fed’s balance sheet to $8.934 trillion, and when will the Fed end QE and stop creating inflation, and start QT and actually start fighting inflation?”
On July 15, Welt author and market enthusiastHolger Zschaepitz,said that the Fed “has already stopped shrinking its balance sheet. “Zschaepitz added that
total assets increased by $4 billion last week to $8.896 trillion, compared to 81.9% for the ECB and 135% for the BOJ; the Fed’s balance sheet now represents 36.5% of US GDP.
A Twitter account called Occupy the Fed Movement talked about the Fed continuing QE the day before Zschaepitz’s tweet.” FED BS Update: FED increases balance sheet by $4BN ($3.3BN “other assets”) same week CPI printed 9.1%,” Occupy the Fed wrote. The Twitter account added sarcastically, “UST up $1.1BN, MBS flat despite supposed QT plan, FED clearly serious about fighting inflation.”
For the past few years, the Federal Reserve has been accused of bailing out megabanks and bringing about an unnatural boom and bust in the US and global economy; since 2020, the Fed’s balance sheet has expanded more significantly than at any other time in history, and the growth in money supply since that year is quite incomprehensible There are.
What do you think about the recent WSJ report that the Fed may stop shrinking its balance sheet? What do you think about accusations that the U.S. central bank is not shrinking its balance sheet very much at all? Let us know what you think about this subject in the comments section below.
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