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

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Economists at monetary policy analyst and forecaster LH Meyer say that with US inflation soaring, the US Federal Reserve may stop cutting its balance sheet sooner than expected. However, critics say the US central bank has not actually cut the Fed’s balance sheet at all, and the organization has been accused of maintaining quantitative easing (QE) practices by continuing to buy long-term securities in the market.

Forecast firm LH Meyer predicts Fed to cut balance sheet sooner than expected, while central bank cuts remain contentious

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US monetary policymakers are outraged by inflationary pressures in the economy and the ongoing debate over the technical definition of a recession. Analysts suspect the Federal Reserve will raise the federal funds rate by at least 75 to 100 basis points or more at its next meeting.

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In addition to raising rates, the Fed said Last year, it will reduce its balance sheet by $8.5 trillion by June 1st. At the time, the central bank said it would gradually stop buying mortgage-backed securities (MBS) and maturing Treasuries.

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As the war in Ukraine continues and inflation surged last month at its highest rate in more than 40 years, many economists believe the US central bank has a lot of work to do when it comes to monetary tightening practices. Former economic adviser to ex-President Barack Obama, Larry Summers, recently mentioned that the Fed has a problem that needs to be addressed.

Speaking of the recession, Summers insisted that everything would depend on “how skillfully [Federal Reserve] turns out… They have a very, very difficult balance problem in setting monetary policy given the situation we are in.”

The latest report on the US consumer price index (CPI) showed that June reflected an increase of 9.1% year on year. Inflation has made many people suspicious that the Fed will be dovish on the next two federal funds rate hikes and possibly halt the central bank’s quantitative easing cut.

However, the reduction of the Fed’s balance sheet, which was supposed to begin in June, did not take place. disputedand many observers count The Fed continued quantitative easing. On the other hand, economists at forecasting firm LH Meyer say the Fed’s cuts “may end early as the risk of a recession rises.” report published in the Wall Street Journal (WSJ).

Economists say Fed could cut balance sheet in 2023, critics insist central bank didn't cut QE at all

The WSJ article details that the risk of a recession could force the Fed to stop cutting its balance sheet “earlier than expected,” according to economists LH Meyer. The firm’s researchers predict a recession is likely to hit in 2024. In addition, the report explains that it is possible that the US central bank could stop quantitative tightening (QT) by next year.

When WSJ general In an editorial via Twitter, many criticized the entire report because they don’t believe the Fed has slashed its balance sheet. “It never started,” one person said. wrote. “The balance continues to grow, there was no reduction,” another person. answered.

Critics Claim Fed Quantitative Easing Programs Are Fully Working

In late June, the gold bug and economist Peter Schiff condemned The US Central Bank for the continuation of the process of quantitative easing. “The Fed’s balance sheet expanded for the third straight week in June,” Schiff said. “A $1.9 billion increase pushed the size of the Fed’s balance sheet to $8.934 trillion. I wonder when the Fed will stop creating inflation by stopping QE and start fighting it by starting QE.”

July 15 author and market maniac Welt, Holger Zschepitz, said the Fed, “has already stopped balance sheet cuts.” Zschepitz added:

Total assets rose by $4 billion over the last week to $8.896 trillion. Fed balance sheet is now 36.5% [the] US GDP vs. 81.9% ECB and 135% Bank of Japan.

A Twitter account called “Movement Occupy the Fed” talked about the Fed’s continuation of quantitative easing the day before Zrzepic’s tweet. “FED BS Update: FED Increases Balance by $4 Billion ($3.3 Billion “Other Assets”) Same Week CPI Prints 9.1%”, Occupy the Fed wrote. “UST is up $1.1bn and MBS is flat despite QT’s alleged plans. The Fed is clearly serious about fighting inflation,” the Twitter account added sarcastically.

For years, the Federal Reserve has been accused of bailing out megabanks and creating unnatural booms and busts in the US and global economy. Since 2020, the Fed’s balance sheet is significantly larger than at any time in history, and the growth in the money supply since this year is pretty hard to fathom.

What do you think of the recent WSJ report that suggests the Fed could stop cutting its balance sheet? What do you think of the allegations that the US central bank hasn’t cut its balance sheet at all? Let us know what you think about it in the comments section below.

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