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Federal Reserve Shrinking Its $9 Trillion Bond Program: Here’s What It Means

When the pandemic struck in 2020, the Federal Reserve put some policies in place to help bolster the economy. They dropped the federal interest rate to zero and started buying billions of dollars in bonds every month. This allowed them to put more money into the economy of the United States. Now, with inflation rising to record highs, the Federal Reserve plans to halt its bond-buying program and unload some of its assets. This, Fed leaders hope, will stall inflation. However, it could have serious implications for the American people.

At a Glance

  • The Fed’s balance sheet is up to $9 trillion, an all-time high.
  • The Federal Reserve plans to halt its bond-buying program and shrink its balance sheet.
  • After shrinking its balance, the Fed plans to raise interest rates.
  • Some experts fear that this may trigger another recession.

The Federal Reserve’s Bond Buying Program: What Did It Do?

In normal financial times, most investors’ portfolios contain a balance of stocks and bonds. Stocks have some risk attached to them. Bonds, on the other hand, are usually safe bets. These are things like US Treasury bonds and secure mortgages. Returns on these investments are modest. However, the fact that they are safe investments balances that out.

In 2020, the Federal Reserve started its bond-buying program. This put much-needed money into the economy. At the same time, it took those safe investments off the market. As a result, many investors began putting their money in riskier stocks like tech companies, startups, and even cryptocurrency, according to CNBC.  

Shrinking the Balance Sheet: What it Means

Now, the Federal Reserve plans to halt its bond-buying program and shrink its balance sheet. They’ll do this by selling off some of the assets that they currently hold. Those assets equal approximately $9 trillion, an all-time high and the Fed will sell off trillions of dollars worth of those assets in the coming years.

The Fed hopes to push forward with this plan as soon as possible. Then, it will raise interest rates. Heads of the Fed hope that this will combat inflation, which is at a 40-year high. Michelle Bowman, a member of the Federal Reserve’s Board of Governors spoke about this in a press conference. “The resulting end of our pandemic asset purchases will remove another source of unneeded economic stimulus for the economy. I expect that these steps will contribute to an easing of recession pressures in the coming months.”

However, some experts believe that this could have disastrous effects on the economy. The combined interest rate hike and shift in bonds may cause stock prices to fluctuate wildly. In short, the Fed’s plan to fight inflation could result in another recession akin to the one we weathered in 2008.

Greg McBride, Senior VP and Chief Financial Analyst at Bankrate.com told CNBC, “The big challenge is raising interest rates enough, tightening policy enough to corral inflation without tipping the economy into a recession. Easier said than done. History is not necessarily on their side.”