Federal Reserve in trouble: ‘They can’t manage to shrink balance sheet’

Last Updated: 14 November 2022

The Federal Reserve is continuously making headlines this year with its extreme interest rate hikes. Another part of its strategy to tackle inflation is to shrink its balance sheet. They do this by, for instance, no longer buying up new US government bonds or even selling debt securities.

Not yet $300 billion

From its peak, the Federal Reserve has not yet managed to shrink its balance sheet by even $300 billion. Last week, $2 billion worth of assets were added to the balance sheet itself.

So much for the Federal Reserve’s attempts to fight inflation by shrinking its balance sheet. Since June, the balance sheet has shrunk by $236 billion, but on the nearly $9 trillion in assets, that is a pittance.

It is therefore questionable whether the Federal Reserve will ever manage to solve this problem. There is a chance that the money printers will eventually have to come back on, because the economy simply cannot keep running on the current relatively high interest rates. The US economy has become addicted to the low interest rates of recent years and the coming months should show what higher interest rates do to business.

ECB not doing much better

Incidentally, the European Central Bank’s balance sheet is not in much better shape than that of the US Federal Reserve. In fact, you could say that the Eurozone is still doing a lot worse than the US, judging also by the performance of the euro against the US dollar.

“The ECB balance sheet continues to record new all-time highs. Lagarde keeps the money printers running at full speed despite the Eurozone facing record high inflation,” Holger Schaepitz said of the ECB in June 2022.

With those figures, the ECB’s balance sheet covers about 82.4 per cent of the Eurozone’s gross domestic product (GDP). For the Federal Reserve, it is 36.6 per cent, the Bank of England is doing it with 39.6 per cent and the Bank of Japan is at the shocking figure of 136.3 per cent.

It seems a matter of time before interest rates, at least in the Eurozone, have to come down again to keep things afloat. Especially thanks to the weaker brethren like Italy, for whom it seems 100 per cent certain that they will not get out of debt without help in any case. In the long run, that can only be positive for bitcoin.

  • Gabriele Spapperi

    Gabriele Spapperi is a veteran cryptocurrency investor and blockchain technology specialist. He became fascinated with Bitcoin and distributed ledgers while studying computer science at MIT in 2011.

    Since 2013, Gabriele has actively traded major cryptocurrencies and identified early-stage projects to invest in. He contributes articles to leading fintech publications sharing his insights on blockchain technology, crypto markets, and trading strategies.

    With over a decade of experience in the crypto space, Gabriele provides reliable insights and analysis on the latest developments in digital assets and blockchain platforms. When he's not analyzing crypto markets, Gabriele enjoys travel, golf, and fine wine. He currently resides in Austin, Texas.

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