The U.S. Federal Reserve is expected to raise interest rates at its next meeting due to the rising inflation and the debate over the definition of a recession. According to analysts, the central bank will increase the funds' rate by around 75 to 100 basis points.
In addition to raising interest rates, the Fed said last year that it would begin to reduce its balance sheet, which was around $8.5 trillion. It said it would stop buying mortgage-backed securities and Treasury bills.
Due to the ongoing war in Ukraine and the rising inflation, many economists claim that the Fed has a lot of work to do before it can start raising interest rates. Larry Summers, a former economic adviser to President Barack Obama, recently noted that the central bank has an issue with its monetary policy.
Summers noted that the Fed has difficulty setting monetary policy when discussing a potential recession due to the current situation. He also said that it will depend on how skillful the central bank manages its monetary policy.
A report released by the U.S. Labor Department showed that the consumer price index rose by 9.1% in June. This has caused many economists to believe that the Fed will be hesitant to raise interest rates in the next few meetings.
Although the Fed's plan to reduce its balance sheet was supposed to start in June, many experts suspected it had already started implementing quantitative easing (QE). According to a report by the Wall Street Journal, economists from a forecasting firm called LH Meyer said that the reduction might stop early as the risk of a recession increases.
Economists from the firm noted that the Fed might be able to start reducing its balance sheet earlier than expected due to the likelihood of a recession. They also predict that a recession will occur in 2024. In addition, the report noted that it might be possible for the Fed to suspend its quantitative tightening program by next year.
Many people criticized the Wall Street Journal's report, saying it did not acknowledge that the central bank has not started reducing its balance sheet. They noted that the central bank's balance sheet continues to grow.
The Fed's balance sheet just expanded for the third week in a row in June. The rise of $1.9 billion increased the size of the Fed's balance sheet to $8.934 trillion. I wonder when the #Fed will stop creating #inflation by ending QE and actually start fighting it by beginning QT.
— Peter Schiff (@PeterSchiff) June 23, 2022
Critics say QE programs are operational
Economist Peter Schiff criticized the Fed for maintaining its quantitative easing program at the end of June. According to him, the central bank's balance sheet had increased by almost $2 billion in the previous week. Schiff wondered when it would stop creating inflation and start fighting it by implementing quantitative easing.
On July 15, economist and market maniac Holger Zschaepitz noted that the Fed has already stopped its plan to reduce its balance sheet.
"Total assets grew by $4bn the past week to $8.896tn. Fed balance sheet now equal to 36.5% of [the] U.S.'s GDP vs ECB's 81.9% and BoJ's 135%," Zschaepitz said.
A day before Zschaepitz's tweet, the Twitter account of the Fed's activist group, known as the Occupy the Fed Movement, criticized the central bank for maintaining its quantitative easing program. It noted that the Fed was still committed to fighting inflation, although the consumer price index had increased by 9.1% in June.
Ever since the financial crisis, the Fed has been accused of creating artificial booms in the global and U.S. economies. Through 2020, its balance sheet has been significantly bigger than any other time in history. Also, the monetary supply growth since 2020 is hard to fathom.