The Fed in action — How do tightening cycles work?

Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 2012 to March 31, 2022. 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 also be coupled with a shrinking of the Federal Reserve’s (Fed) balance sheet.
  • The Fed officially began its policy tightening cycle in March. We expect further rate hikes throughout the year and for the Fed to begin shrinking its balance sheet soon.