The Federal Reserve is narrowing its $9 trillion bond program
Key takeaways:
- The central bank of the United States can make cash to enable the economic sector during crises.
- The Federal Reserve’s $9 trillion balance sheet has made investors into more dangerous holdings.
- Critics believe assets will be repriced as the Fed’s bonds are traded or mature.
Federal Reserve is narrowing its bond program:
Members of the Federal Reserve argue how fast to lower the central bank’s portfolio of bonds without beginning a recession.
Heading into the second quarter of 2022, the balance of Federal Reserve’s acquisitions is nearly $9 trillion. The bulk of these investments is securitized holdings of government debt and mortgages. Most were bought to calm investors during the subprime mortgage crisis in 2008 and 2020′s pandemic.
“What’s happened is the balance sheet has become more of a means of policy.” Roger Ferguson, ex-vice chairman of the Federal Reserve Board of Governors, informed CNBC. “The Federal Reserve is utilizing its balance sheet to get better results in history.”
The U.S. central bank has long used its capacity as a lender of final resort to adding liquidity to markets during times of distress. When the central bank purchases bonds, it can drive investors toward more complex assets. The Fed’s policies have increased U.S. equities despite questioning financial conditions for small businesses and regular workers.
Kathryn Judge, a teacher at Columbia Law, says the Fed’s motivation is like grease for the gears of the economic system. “If they apply too much grease too often, there are worries that the overall machinery becomes risk-seeking and weak in alternative ways,” she spoke to CNBC in an interview.
Critics think that the Fed’s intention to raise interest rates in 2022 then fast lower the balance sheet could set off a recession as more hard assets are repriced.