Federal Reserve to shrink $8.9-trillion portfolio in war on inflation

The Federal Reserve is about to start shrinking its $8.9 trillion balance sheet, deploying a second tool alongside higher interest rates to curb inflation, though officials don’t know just how effective it will be.

After doubling in size through asset purchases in the first two years of the pandemic, the balance sheet will be reduced at a pace that’s almost twice as fast as after the last financial crisis. While the process officially commences on Wednesday, the first US Treasury securities won’t run off until $15 billion mature on June 15. The Fed is capping monthly runoff at $47.5 billion — $30 billion for Treasuries and $17.5 billion for mortgage-backed securities — until September. Those thresholds will then double to a combined $95 billion. That compares to a peak of $50 billion a month when the Fed performed the exercise starting in 2017.

Officials say the reduction will work in tandem with interest-rate increases to cool price pressures by tightening financial conditions. But it’s not clear how much impact the balance sheet will have. As Fed Governor Christopher Waller put it in a speech on Monday, estimates “using a variety of models and assumptions” are “highly uncertain.”

The Fed deployed massive asset purchases during the 2008 financial crisis for the first time since World War II, expanding the balance sheet to about $4.5 trillion by the time it stopped buying at the end of 2014. It then waited three years before allowing it to begin shrinking at the end of 2017, reducing it to about $3.8 trillion by September 2019.

Uncertainty over the course of the balance sheet was said by commentators to have contributed to the market turmoil that ultimately helped bring an end to the Fed’s last rate-hike campaign, which concluded in December 2018.

On Tuesday, US President used a rare meeting with Fed chair Jerome Powell to declare that he’s respecting the central bank’s independence — while simultaneously shifting responsibility for taming decades-high inflation ahead of the November midterms.

Biden seized on the Oval Office session to argue that while fighting price increases is his top priority, that work was primarily the purview of the Federal Reserve. “My plan is to address inflation. That starts with a simple proposition: respect the Fed, respect the Fed’s independence, which I have done and will continue to do,” Biden said.

It’s Biden’s third in-person session with Powell since taking office, and recalls the stakes when Ronald Reagan met with then-Fed chief Paul Volcker almost four decades ago as he sought re-election amid galloping price pressure.

Biden has been attempting to show he’s maximizing efforts to curb the hottest inflation in 40 years heading into November midterms, in which Democrats’ risk losing their slim congressional majorities.

The White House has increasingly sought to shift the burden for battling prices to the Fed in public comments, as polls show rising costs are voters’ top concern. In an op-ed published Monday in the Wall Street Journal, Biden said the Fed has “a primary responsibility to control inflation.”

‘Not seeking to oust Putin’

Biden also said on Tuesday that the US is not seeking to remove Russian president Vladimir Putin from power in response to his invasion of Ukraine, months after the US president had said “this man cannot remain in power.”

“We do not seek a war between NATO and Russia. As much as I disagree with Mr. Putin, and find his actions an outrage, the will not try to bring about his ouster in Moscow,” Biden wrote in an op-ed for the New York Times published.

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