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The next move

The Fed balance sheet has shrunk by 18.5% from the prior peak of $9Tn, as you can see in the chart below. After the great financial crisis and before the pandemic, the Fed tried to unwind QE and tried to reduce the balance sheet, only to succumb to reality with subsequent stimuli, increasing its size even more. You can see those instances in 2009 and 2019, and how they returned to peak value almost vertically. This time, it has reduced its size significantly and it has raised rates aggressively, and the big question is, if they can sustain this level of tightness, and for how long. Starting on June, the pace of reduction of the Fed SOMA portfolio will decrease, among other things, to minimize the impact on the US deficit and the Treasury market. Will thay pave the way for another balance sheet expansion?

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