During the recent banking crisis, the Federal Reserve, the central bank of the US, has increased its balance sheet for the first time in a year. The Fed has been raising interest rates since March 2022 to combat inflation rates. Alongside raising rates, the Fed has been reducing its balance sheet by undergoing quantitative tightening (QT). The opposite of QT is quantitative easing (QE), the formula adopted in 2020 and 2021 to help stimulate the economy. The Fed’s actions in tackling inflation have suppressed financial markets as they removed money from the economy. The Fed's liquidity injection stimulated the U.S. economy following months of lockdowns and was partly the reason for the massive rally in the stock and cryptocurrency markets.

Money Printer Go Brrrrrrr

Since March 2022, the Fed’s balance sheet has shrunk by 7%, reducing by approximately $626bn following the hawkish monetary policy Jerome Powell has adopted.

An outlook of the Fed balance sheet. Source: Tradingview

As of the 1st of March 2023, the balance sheet was valued at around $8.33 trillion. The collapse of Silicon Valley Bank (SVB) prompted the current banking crisis, which has begun to creep worldwide. Other banks, such as Signature Bank, followed SVB out of the door, with other banks facing an emerging liquidity crisis’. But it isn't just a liquidity crisis causing the banking woes. Banking stocks are being obliterated in fear of an ever-worsening situation. This leads to bank runs and a severe loss of confidence in the traditional financial system from its customers who trust banks to custody their money. The Fed appears to be prepared to solve liquidity issues as it has printed around $393Bn since the crisis began. This has increased the balance sheet by approximately 4.71%, reversing months of monetary tightening. U.S. officials are working to increase the $250,000 FDIC insurance limit with billions of dollars at stake and an uncertain road ahead for Banks. This could be partly the reason for the increasing balance sheet or if the Fed is preparing to bail Banks out instead of allowing them to go bust. The U.S. certainly has a rocky few weeks ahead, and the Biden administration will be scrambling to resolve the situation with the Presidential vote approaching in 2024.