The Federal Reserve’s attempt at shrinking its balance sheet through so-called quantitative tightening, or QT, is “a complete mistake,” according to Mizuho’s chief economist for the U.S. “There is a nontrivial probability that market liquidity will be adversely affected well before the targeted $2 trillion has been rolled off, preventing the Fed from accomplishing its goal,” said Steven Ricchiuto, U.S. chief economist at Mizuho, in a note Monday. The Fed is letting its bond holdings, which includes U.S. Treasurys, roll off under quantitative tightening while also raising its benchmark interest rate as a primary tool to fight high inflation in the U.S.
The Fed’s balance sheet had expanded to around $9 trillion during the pandemic after the central bank embarked on a bond-buying program known as quantitative easing, which included the purchase of U.S. Treasurys, to help provide market liquidity as the COVID-19 crisis struck. “Bank liabilities expand to meet the reserve balances in the system and the Fed’s own analysis suggests th …