The US Fed will kick off its policy tightening cycle

Significance

Part of its policy tightening will involve reducing its balance sheet, which has expanded from just over USD4tn at end-2019 to almost USD9tn. The Fed stopped buying bonds last month but is not reducing its holdings yet, instead ‘rolling over’ or repurchasing the bonds on the balance sheet as they mature.

Impacts

• The Ukraine invasion presents at least two risks to the US economy: further increases in prices and additional supply chain instability.
• The Fed is not so much concerned about current inflation but about longer-term inflation expectations, which for now remain restrained.
• President Joe Biden has nominated three new Fed governors who might shift the balance in favour of more progressive policies.
• Jerome Powell is expected to get Senate confirmation for a second Fed chair term soon, with Lael Brainard set to be confirmed as vice chair.