Trillions of dollars could reportedly be yanked out of the banking system as the Federal Reserve intensifies its efforts to combat inflation.
According to a new Fed paper, the Federal Reserve is looking at drastically reducing the amount of cash swirling in the banking system as the central bank marches on with its tight monetary policies, reports Reuters.
The paper estimates that bank reserve balances parked at the Fed could be slashed by as much as 90% from $6 trillion down to as low as $600 billion.
Back in 2020, the Federal Reserve initiated a massive securities-buying program to keep the economy afloat.
The Fed bought US treasuries and mortgage-backed securities (MBS) on the open market, pumping trillions of dollars into the banking system in an effort to spur lending and economic activity.
The massive accumulation of securities pushed the Fed’s balance sheet to an all-time high of nearly $9 trillion at the start of 2022.
With inflation plaguing US consumers, the Federal Reserve is already unwinding its massive bond and MBS portfolio to suck excess liquidity out of the banking system.
The reduced amount of cash reserves will likely force banks to pull back on their lending, which could lead to a decline in economic activity and aid the Fed in combatting sticky inflation.
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