Chart with area plot showing the Fed balance sheet as percent of GDP and line showing the federal funds target rate from January 2012 to December 2023. The chart compares the previous federal funds rate quantitative tightening cycle in 2017-2019 with the current quantitative tightening cycle. The Fed has raised interest rates and reduced the balance sheet at a faster pace during this quantitative tightening cycle.
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 2012 to December 31, 2023. For illustrative purposes only. Fed = Federal Reserve. GDP = gross domestic product.
Key Takeaways
- A tightening cycle is a period of rising policy rates, and, at times, it can be coupled with a shrinking of the Fed’s balance sheet (quantitative tightening).
- The Fed officially began its policy tightening cycle in March 2022. We no longer expect further rate hikes in this cycle. The Fed will continue to allow its bond holdings to mature without reinvesting the proceeds, resulting in a decline in its balance sheet holdings.