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Holdings Of The Fed

Holdings of the Fed

Second punch to go after inflation starts today.

The Federal Reserve’s tightening campaign enters a new phase today that — paired with rapid interest rate hikes — will be hard for financial markets to predict.

Why it matters: At the onset of the pandemic, the Fed injected stimulus into the economy at an unparalleled scale. Now it will step up the withdrawal of that support, part of a two-pronged approach aimed at crushing inflation.

With quantitative tightening (QT) entering full speed as of today, the question now is if it will cause things to break in the financial system.

Catch up quick: As the pandemic hit, trillions of dollars’ worth of Fed stimulus (quantitative easing, or QE) helped ease financial and economic conditions, and swelled its balance sheet by $5 trillion in just two years.

But as the Fed sought to tighten policy to ward off rising inflation, it began a drawdown of its balance sheet by letting bond holdings roll off earlier this year. Starting this month, QT enters a more aggressive phase.

Axios Macro By Neil Irwin and Courtenay Brown · Sep 01, 2022