Line chart comparing the previous Fed funds rate quantitative tightening cycle and the Fed balance sheet.
Left Y-axis: Federal Reserve (Fed) balance sheet as a percent of GDP (%); right Y-axis, Fed funds target rate-upper bound (%); X-axis: 2012-2022.
Following are actions in the previous quantitative tightening cycle by the Fed.
- The Fed balance sheet opened the period near 18.5% of GDP when the Fed funds target rate was at 0.25%.
- Holdings fell somewhat to 17.5% by late 2012.
- The balance sheet then increased significantly to over 25% by February 2014 while the funds target rate remained at 0.25%.
- By late 2015, with the balance sheet declining somewhat to just over 24%, the first rate hike increased the Fed funds rate to 0.5%.
- A second rate hike to 0.75% occurred in December 2016, when the balance sheet stood at about 23.5%.
- This was quickly followed by a third rate hike, to 1%, in March 2017, and a fourth—to 1.25% in June 2017.
- A fifth rate hike, to 1.5% followed in December 2017 (balance sheet at 22.5%), and a sixth, to 1.75% quickly followed in March 2018 (balance sheet at 22.1%), and again in June 2018 (to 2%, balance sheet at 21.3%), and again in September 2018 (2.25%, balance sheet at 20.5%) and finally reaching a high of 2.5% in December 2018 (balance sheet at 19.7%).
- From there the funds rate and balance sheet declined more steeply, with the rate falling to 2.25% in July 2019 (balance sheet at 17.8%), 2% in September 2019 (balance sheet at 18.1%), 1.75% in October 2019 (balance sheet at 18.8%) and finally returning to 0.25% when the balance sheet stood at just over 24% in March 2020.
- After that decline, the balance sheet again began to grow rapidly, reaching 34% in October 2021, over 37% in July 2021, and peaking at over 38% in February 2022, with the target rate still at 0.25%.
- In Q2 2022 the Fed target rate rose from 0.5% to 1.75%, with the balance sheet near 37% of GDP.
A circle on the chart calls attention to the previous tightening cycle.
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 2012 to June 30, 2022. For illustrative purposes only. Fed = Federal Reserve. GDP = Gross Domestic Product.
- 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 balance sheet.
- The Fed officially began its policy tightening cycle in March. We expect additional rate hikes through year-end, and for the Fed to continue shrinking its balance sheet.