The Federal Reserve, that elusive entity that seems to hold the keys to the country’s financial kingdom, has been on a bit of a rollercoaster ride since the 2008 financial crisis. In an effort to kickstart the economy and make borrowing more enticing, the Fed decided to beef up its balance sheet, essentially flooding the market with more money. And boy, did it work like a charm! Suddenly, borrowing was as easy as snagging the last donut at the office potluck.
Fast forward to today, and the Biden administration has been on a spending spree that would make even the most seasoned shopaholic blush. Over $6 trillion added to the national debt? No biggie! Why? Well, because the Federal Reserve is here to save the day once again. With its balance sheet still looming large at a whopping $7.5 trillion, the Fed is essentially the financial Robin Hood of our modern times, robbing from the balance sheet to give to the debt-ridden masses.
But hold on to your hats, folks, because the Fed recently decided it was time to go on a bit of a diet. In August 2022, they kicked off their “Balance sheet normalization” plan, which basically means they’re letting some of those securities mature and roll off the balance sheet instead of playing a never-ending game of financial whack-a-mole. This plan was meant to slim down the balance sheet by $1.5 trillion over 20 months – not too shabby. However, even after this mini-makeover, the balance sheet still stands tall at $7.4 trillion.
Now, some may argue that the Fed officials are turning a blind eye to the elephant in the room – or should we say, the elephantine balance sheet that has ballooned over the past two decades. Back in the good ol’ days, the balance sheet was a mere blip on the financial radar, less than a trillion dollars to be exact. But come January 2020, that number had skyrocketed to a hefty $4.5 trillion. It seems like the Fed is playing a high-stakes game of financial Jenga, hoping the tower won’t come crashing down.
So, what’s the solution to this financial frenzy? Well, some experts suggest reining in the Fed and pushing them to speed up the process of balance sheet “Normalization.” If we want to avoid a financial apocalypse and bring some much-needed sanity back to our fiscal policies, it might be time to crack the whip and get the Fed back in line. After all, a little balance sheet spring cleaning never hurt anyone – except, maybe, the donut budget at the next office potluck.