If the central bank couldnвЂ™t run off $700 billion in 2018 without popping the bubbles and shaking up the economy, what makes anybody think it can decrease its balance sheet holdings by $3 trillion this time around with even bigger bubbles and more debt in the economy? The Mechanism If it sticks to this plan, it will shrink the balance sheet by about $1 trillion per year.Д«ut I donвЂ™t even think it can accomplish this. Looking at the big picture, the FedвЂ™s plan is relatively modest. This would leave the balance sheet at $6 trillion вЂ“ up by $2 trillion from its pre-pandemic level and more than $5 trillion above the pre-2008 financial crisis level. She did not say what that actually means, but the Fed minutes from the March meetingВ shed a little bit of light on the nuts and bolts of the plan.ДЄccording to the minutes, the plan is to reduce the balance sheet by about $3 trillion over a three-year period. Over the last two years, the Fed has added another $5 trillion to the balance sheet expanding it to nearly $9 trillion.Д«rainard indicated that the upcoming balance sheet runoff will be вЂњconsiderablyвЂќ faster than last time. By the time the Fed launched QE 4 in 2020, the balance sheet had already expanded back to just over $4 trillion. ItвЂ™s important to remember that the Fed resumed QEВ months before the pandemic - although it didnвЂ™t call it QE. The markets and the economy couldnвЂ™t handle even the modest monetary tightening the Fed managed to implement. Why did the Fed abandon tightening in 2019?Д«ecause in the fall of 2018, the stock market tanked and the economy went wobbly. In all, the Fed shed about $700 billion from its balance sheet in a little more than 18 months. By the time it ended tightening in August 2019, the balance sheet was just below $3.8 trillion. The Fed didnвЂ™t get around to balance sheet reduction until 2018, and it did so at a relatively slow pace. He said the balance sheet expansion was an emergency measure and that the Fed would eventually sell the bonds it was buying. When the central bank started QE, then-Fed Chair Ben Bernanke sworeВ the central bank wasnвЂ™t monetizing federal government debt. Through three rounds of quantitative easingВ (QE), the Fed expanded its balance sheet from under $1 trillion to $4.5 trillion. The Fed first expanded its balance sheet in the wake of the 2008 financial crisis. I, Peter Schiff and a few others outside the mainstream have said the Fed wonвЂ™t be able to do this. Earlier this week, Federal Reserve governor and vice-chair nominee Lael Brainard indicatedВ the central bank will shrink its balance sheet at a вЂњconsiderablyвЂќ more rapid pace than it did during the previous cycle.

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