The Federal Reserve recently began shrinking its massive balance sheet, unwinding trillions of dollars worth of bond purchases that it started making during the depths effort to offset the effects of the Covid-19 pandemic.
It’s not the first time that the Fed has undertaken ‘quantitative tightening,’ as the process is called. But this time around is different. The central bank is withdrawing stimulus at an unprecedented speed.
The big question for markets now is what the impact of this liquidity withdrawal will actually be, and whether differences in the size and composition of the Fed’s more recent market operations make this bout of ‘QT’ different to previous episodes. Joseph Wang is a former trader on the Federal Reserve’s open markets desk and now blogs about the central bank as “Fed Guy.” In this episode, he walks us through the mechanics of the central bank’s big balance sheet unwind, explains how it might affect markets, and outlines all the uncertainties that still surround this huge operation.