Expert insight

The Fed’s plan to shrink its balance sheet, quickly

May 10, 2022

What’s behind the faster pace of quantitative tightening?
The Fed’s balance sheet roll-off: Different circumstances, different plan
Annotations on a line chart showing the Fed’s balance sheet indicate that its holdings expanded to $4.2 trillion, or 24% of nominal GDP, in November 2014. Annotations also indicate that the Fed’s holdings expanded to $8.5 trillion, or 35% of nominal GDP, in early 2022. Vanguard projections show the Fed reducing holdings over the coming years. A shaded area shows Vanguard’s projection of the optimal balance sheet size rising from 2015 beyond 2027. A table within the chart shows the inflation gap at negative 0.5%, the unemployment gap at 0.7%, and the output gap at negative 2.1% in November 2014. For May 2022, the table shows the inflation gap at 3.1%, the unemployment gap at negative 0.4%, and the output gap at negative 1.3%.
Why interest rates will remain the Fed’s primary tool
A challenging environment for central banks ahead

Contributors

Brian Quigley
Vanguard Insights

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