What is the Fed's balance sheet reduction? The Fed will slow down the balance sheet reduction from June, which is equivalent to flooding the market? Good news for#BTCto break through 73,700?
The Fed's monetary policy tools mainly include three: the federal funds rate, the balance sheet, and forward guidance.
Among them, the balance sheet is an unconventional monetary policy measure taken by the Fed after the financial crisis. The Fed prints dollars by purchasing Treasury bonds or mortgage-backed securities (MBS). Inject liquidity into the market, lower long-term interest rates, and stimulate economic activity.
The main items of the Fed's balance sheet include:
Asset side:
Treasury bonds: bonds issued by the US government, which are one of the important assets of the Federal Reserve.
Mortgage-backed securities (MBS): securitization products based on mortgages.
Other assets: may include other securities, loans, gold, etc.
Liabilities side:
Bank reserves: reserves deposited by commercial banks at the Federal Reserve.
Reverse repurchase agreements: short-term repurchase transactions with financial institutions.
Fiscal deposits: deposits of the US Treasury at the Federal Reserve.
There are other liabilities.
The size and changes of these items reflect the Fed's monetary policy operations and their impact on the economy. By adjusting the structure of the balance sheet, the Fed can influence the money supply, interest rate level and financial market conditions to achieve its monetary policy goals.
After the 2008 financial crisis, the Fed implemented three rounds of QE, printing a large amount of US dollars to buy Treasury bonds and MBS, causing the balance sheet to expand sharply from US$900 billion in 2008. This is expansion.
Conversely, for example, the original balance sheet size was US$8 trillion, and now it is US$7 trillion, which is shrinking.
Shrinking the balance sheet means selling assets (Treasury bonds or MBS) and withdrawing US dollars from the market to achieve the purpose of reducing assets and liabilities. Thereby playing a role in curbing inflation and reducing financial leverage. It can be carried out in the following three ways
1. Directly sell existing assets, such as selling US Treasury bonds and MBS;
2. Wait until the bonds held expire naturally and stop buying new bonds;
3. Buy short-term bonds and sell long-term bonds to quickly shorten the duration of held assets.
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