Economists Say Fed Could Shrink Balance Sheet in 2023, Critics Insist Central Bank Hasn’t Reduced QE at All – Economics Bitcoin News

With inflation soaring in the U.S., economists from monetary policy analytics and forecasting firm LH Meyer say the U.S. Federal Reserve could stop shrinking its balance sheet earlier than expected. However, critics have said the U.S. central bank hasn’t really shrunk the Fed’s balance at all, and the entity has been accused of keeping quantitative easing (QE) practices persistent by continuing to purchase long-term securities from the market.

Forecasting Firm LH Meyer Predicts Fed Will Shrink the Balance Sheet Earlier Than Expected, While the Central Bank’s Reductions Remain Contested

U.S. monetary policymakers are up in arms over the economy’s inflationary pressures and the current debate over the technical definition of a recession. Analysts suspect the Federal Reserve will increase the federal funds rate by at least 75 to upwards of 100 basis points (bps) at the next meeting.

In addition to the rate hikes, the Fed said last year that it would reduce the $8.5 trillion balance sheet by June 1. The central bank said at the time it would slowly stop purchasing mortgage-backed securities (MBS) and maturing Treasuries.

As the war continues in Ukraine and inflation rose at the highest pace in over 40 years last month, many economists believe the U.S. central bank has a lot of work to do when it comes to monetary tightening practices. The former economic adviser to ex-president Barack Obama, Larry Summers, recently mentioned the Fed has an issue to deal with.

When speaking about a recession, Summers insisted that things will depend on “how skillful the [Federal Reserve] turns out to be… They’ve got a very, very difficult problem of balance in setting monetary policy, given the situation in which we find ourselves.”

The latest U.S. Consumer Price Index (CPI) report had shown that June reflected a 9.1% year-over-year increase. The inflation has caused a number of people to suspect the Fed will be dovish on the next two federal fund rate hikes and possibly halt the central bank’s QE reduction.

However, the Fed’s balance sheet reduction that was supposed to start in June has been contested, and many observers think the Fed has continued QE. On the other hand, economists from the forecasting firm LH Meyer say the Fed’s reduction “may stop early as recession risk rises,” according to a report published by the Wall Street Journal (WSJ).

The WSJ article details that recession risk may make the Fed stop shrinking its balance sheet…