Fed balance sheet reduction refers to measures taken by the Federal Reserve to reduce assets and liabilities. The Fed’s shrinking of its balance sheet will simultaneously sell assets, recover funds and reduce assets and liabilities on its balance sheet to regulate monetary policy . A shrinking Fed balance sheet is a tight monetary policy that will reduce the amount of dollars in circulation .
When the Fed shrinks its balance sheet, it extracts money from the economy. When the money decreases, the value of the corresponding currency begins to increase. Therefore, the Fed’s shrinking balance sheet is equivalent to a disguised appreciation of the dollar. A reduction in the Fed’s balance sheet will help rebuild the dollar’s credibility, reduce the negative externalities of Fed rate hikes , and provide the world with high-quality dollar assets , which will help alleviate the lack of risk-averse assets such as Europe and Japan, and Reduce the impact of Fed rate hikes on monetary easing countries.
The Fed’s shrinking balance sheet is equivalent to a stricter monetary policy of raising interest rates. Everyone should know this law: as a hedge commodity, as long as the dollar rises, dollar-denominated gold will fall accordingly. The reduction in the size of the Fed is a manifestation of the Fed raising interest rates in disguise.