After roughly doubling its balance sheet to $9 trillion after the pandemic, the Fed began unloading some of the Treasuries and mortgage-backed securities it holds in June at a pace of $47.5 billion. It has announced that this month it is ramping up the pace of quantitative-tightening to $95 billion.
Although recent data have shown the U.S. economy has remained resilient in the face of higher interest rates, many economists believe tighter monetary policy is increasing the chances of a recession next year.The New York Fed projected in May that the central bank will shave $2.5 trillion off its holdings by 2025.
Investors next week will watch August consumer price data for signs inflation has peaked. The Fed will hold its monetary policy meeting on Sept. 21.Jake Schurmeier, a portfolio manager at Harbor Capital Advisors, said reduced liquidity from tightening financial conditions is already making it more difficult to take large bond positions and will likely contribute to more volatility ahead."It gives us pause before we make any moves," he said.