Full Impact of Shrinking its Balance Sheet in 2019 Not Foreseen by Central Bank

In the coming months, the full impact of the Federal Reserve’s quantitative tightening (QT) program is set to be felt, the central bank not foreseeing the impact of shrinking its balance sheet four years ago as admitted by Federal Reserve Chair Jerome Powell. QT, which involves letting Fed bond holdings mature without replacement, thereby draining cash from the financial system, remains complex and hard to predict according to Wall Street economists and strategists. While the Fed is “committed to avoiding a repeat of 2019” — when the repo (repurchase agreement) market seized up, how it handles the process “could shape its political latitude to keep using its balance sheet as a key tool in the future.” Currently shedding its bond holdings at an annual pace of roughly $1 trillion, which is much faster than in 2019 but from a much bigger base, the process has been moving smoothly however, concerns exist among some economists and strategists.

Source:    https://fortune.com/2023/07/10/jerome-powell-federal-reserve-trillions-balance-sheet-unwinding-quantitative-tightening/