The Fed in action — How do tightening cycles work?

Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 2012 to June 30, 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 also be coupled with a shrinking of the Fed’s balance sheet.
  • The Fed officially began its policy tightening cycle in March 2022. We expect an additional rate hike this year and for the Fed to allow its bond holdings to mature without reinvesting the proceeds, resulting in a decline in its balance sheet holdings.