Fed balance sheet hits lowest level since April 2021

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A recent review of the Federal Reserve’s (Fed) balance sheet suggests a significant quantitative tightening trend in 2023.

The report said that in the past week alone, the Fed’s balance sheet shrunk by about $15 billion, indicating that economic changes are coming in the near future.

In this regard, Charlie Bilello, director of market strategy at Creative Planning, commented that 2023 may set a new record for balance sheet reduction: an absolute reduction of US$827 billion and a percentage reduction of US$9.7 billion, the lowest level since April 2021.

The total assets of the Federal Reserve.Source: Charlie Bilelo

Historically, the Fed has typically responded to recessions by injecting liquidity into the market through quantitative easing. The balance sheet expanded 151% during the 2008 recession and 77% during the 2020 COVID-19 crisis.

But the current economic contraction raises questions about the Fed’s strategy in the event of another recession.

It is unclear whether the Fed will continue its quantitative tightening policy or resume balance sheet expansion as it has during previous economic challenges.

However, this uncertainty, coupled with its potential impact on various sectors, highlights the importance of closely monitoring changes in the Fed’s balance sheet.

Federal Reserve Balance Sheet: (Source: FRED)