February 01, 2022

Fed Chairman Jerome Powell announced the acceleration of the Fed bond purchases reduction. The thought of a balance sheet reduction or tapering has unsettled the markets. The pundits are calling for an increase in interest rates. They cite the experience with the Fed rate increases during 1994, 1999, 2004 and 2015. But as one looks at the Fed balance sheet , only one of the episodes coincides with a significant reduction of the Fed balance sheet. For those wondering what happened to interest rates during that time, the short end of the yield curve and the interest rate paid on deposits and reserves steadily rose peaking at the end of 2018. If the past repeats itself, as the Fed reduces its balance sheet, we expect a rise at the short end and a flattening of the yield curve .

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