Fed Balance Sheet Unlikely to Shrink Meaningfully, Brookings Analyst Says on July 5

According to Robin Brooks, a researcher at the Brookings Institution, the Federal Reserve is unlikely to meaningfully reduce its balance sheet, even as new Fed Chair Kevin Walsh has pledged to pursue quantitative tightening. In a Substack post on July 5, Brooks stated that "the Fed has no way to shrink its balance sheet without long-term Treasury yields rising," and that "the possibility of the Fed meaningfully reducing its balance sheet is slim." The Fed's balance sheet stands at approximately 21% of U.S. GDP, with Treasury holdings accounting for roughly two-thirds of that total. Brooks emphasized that shrinking the balance sheet would require accepting higher Treasury yields, a scenario that faces political resistance amid concerns over uncontrolled fiscal policy.
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