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Can the Fed reduce its balance sheet?

There has been a lot of talk about quantitative tightening, and how the #fed will let their bond portfolio run off but, how much can the #fed reduce its #balancesheet? The answer may be more on the liability side than on the asset side. As with any balance sheet, assets must equal liabilities, which means that if the Fed wants to reduce its size, both sides need to decrease. In the liability side, the total is the sum of: banks reserves + Reverse repos + currency in circulation + UST general account. Can any of these components be reduced meaningfully? It’s difficult to see LESS currency in circulation without choking the economy, particularly at a moment where #gdp is negative. Banks reserves are probably not going down much either, as the interbank placements have been reduced to minimums after #zirp. Reverse repos are going UP by the day, and the treasury general account will fluctuate but it’s not going to have a big impact. So, how much can it really go down? And what does that mean for long term #inflation?

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