The Federal Reserve’s campaign to shrink its balance sheet is to reduce the purchased bonds and MBS on the asset side and recover dollars on the liability side. In specific, the Federal Reserve directly withdraws the base currency in the market through selling its holdings or suspending maturing bonds reinvestment. In essence, these measures to raise the interest rates in disguise are more stringent than general monetary tightening policies and have a greater impact on liquidity. Through shrinking the balance sheet, the Federal Reserve can sell domestic assets and withdraw the US dollars from circulation in the market. It is direct measure to restore the base currency in order to normalize the monetary policy. It is much stricter than just raising the interest rates, which demonstrates the Federal Reserve’s assertive attitude to normalizing the monetary policy. The Federal Reserve has reduced its balance sheet seven times since 1920. Data have shown that every time that the Federal Reserve shrank its balance sheet, the economy of other countries would be greatly impacted. Some saw sharply rising prices, some with sharp economic downturn, and others with significant increase in capital outflow. On September 20, 2017, the Federal Reserve announced that it would reduce its balance sheet of $4.5 trillion from October 2017. It was the first time since the international financial crisis in 2018 that the Federal Reserve announced to shrink its balance sheet, which also marked further tightening of its monetary policy. This week, Professor Liu Zhibiao, Dean of Yangtze IDEI, held discussions with relevant experts and scholars on the topic “Impact of the US Shrinking the Balance Sheet on China’s Economy”.
