Fed ready to start reducing the size of its balance sheet – ANZ

Federal Reserve’s wind-down of the balance sheet will be discussed over coming meetings. As a base case scenario for the Fed’s balance sheet reduction, economists at ANZ chose an asset wind-down of $80bn/month, reached six months after starting the normalisation in Q3 2022.

Shrinking the Fed’s balance sheet

“We expect the Fed to begin normalising its balance sheet in Q3 2022 after it has delivered around 100bps of hikes. Details are scant, but we know that the rundown will be faster and deeper than the 2017-19 episode.”

“Chair Powell thinks asset reduction will have limited financial or macroeconomic implications and can occur ‘in the back-ground’. We are more cautious.”

“Our base case scenario is for the Fed to start gradually reducing its asset holdings from Q3 2022 until it reaches a maximum of $80bn/month after six months.”