Fed Plans To Trim Its Massive $4.5 Trillion Balance Sheet
June 20, 2017
The Fed policy committee approved a formal plan in early May for reducing its massive $4.5 trillion balance sheet of Treasury and mortgage bonds, starting before the end of this year. Since no central bank has ever amassed a debt remotely this large, the new plan to reduce it is unprecedented and therefore fraught with risks. I will attempt to explain the plan to “unwind” the Fed’s $4.5 trillion balance sheet, and what could go wrong, as we go along today. Suffice it to say that if the Fed gets this wrong, interest rates could spike higher, stocks and bonds could tumble and, worst-case, a new recession could unfold early next year.
Hopefully, the Fed will get it right and the massive balance sheet unwind will go as planned. Since that is far from certain, I want my clients and readers to understand the risks and possible market implications so that you can take action, if need be, well ahead of time. Let’s jump right in.