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In recent months, the Federal Reserve has been purchasing bonds at a decreasing rate. This is evident in the flattening of the slope of the total assets plot.

The Fed's total assets plot... federal reserve total assets plot

The differential from 2022 February 23 to March 9 is close to zero. The plot has flattened recently.

Inflation was reported as 0.8% for 2022 February, which if annualized would be 10%. The one year inflation rate was reported as 7.9%. Both numbers are considered to be higher than the Fed wants them to be.

Today, 2022 March 16, the Fed is expected to announce that the short term interest rate (the federal funds rate, FFR) will be increased in order to reduce the inflation rate.

There is another way to raise interest rates. If the Fed does not purchase bonds to replace maturing bonds, the private sector would have to hold more bonds (assuming a constant level of Treasury debt, LOL) which can lead to interest rates being higher. If the Fed sells some bonds, the private sector would have to hold more bonds which can lead to interest rates being higher. Presumably some of these things can happen in the future. In 2018 and part of 2019, the Fed reduced bond holdings. This followed federal funds rate increases that started about 2 years earlier at the end of 2015. The precedent seems to be to raise the federal funds rate before reducing bond holdings.

What reasons has the Fed given in writing or the public statements of officials for increasing the federal funds rate before using balance sheet reduction (bond sales or declining to purchase to replace maturing bonds) to increase interest rates?

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    $\begingroup$ If you slow down a car, do you shift down, or use your brakes; or both? They already reduced the bond purchases, which were ramped up significantly since COVID. Instead of only doing one thing, usually it is more effective to do several things at the same time. If you keep rates at record lows, the cost of borrowing will still be based on this rate and not dampen spending. Sorry, not a official statement though. $\endgroup$
    – AKdemy
    Mar 16, 2022 at 22:16
  • $\begingroup$ @AKdemy I'm not asking about reduced bond purchases. I'm asking about reducing the level of bond holdings. $\endgroup$
    – H2ONaCl
    Mar 16, 2022 at 22:55
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    $\begingroup$ Since bonds expire, this should be closely related, no? $\endgroup$
    – AKdemy
    Mar 16, 2022 at 23:11
  • $\begingroup$ @Akdemy No, at the time they were still buying bonds to replace the ones that mature so the level of bond holdings did not decrease. On 2022 March 16 the Fed said "we expect to announce the beginning of balance sheet reduction at a coming meeting". $\endgroup$
    – H2ONaCl
    Nov 1, 2023 at 5:25

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The Richmond Fed has published a long paper which contains this quote:

"They want to set QT on a fixed course and not have it be the focus of people's attention, because they want people paying attention to the federal funds rate as the instrument of monetary policy," says William Nelson, executive vice president and chief economist of the Bank Policy Institute and former deputy director of the Division of Monetary Affairs at the Fed Board. "Of course, even though it's drying paint, that doesn't mean it's not imparting some restraint on the economy”

https://www.richmondfed.org/publications/research/econ_focus/2022/q3_federal_reserve

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