Rep. Jeb Hensarling (R., Texas) said in a Wednesday interview with the Washington Free Beacon that when the Federal Reserve begins to unwind its balance sheet of roughly $4.5 trillion there will be a bout of inflation or possibly a recession.
The Fed traditionally conducts monetary policy by setting the federal funds rate, “the rate at which banks borrow and lend reserves on an overnight basis.” The Fed lowered this rate almost to zero in December 2008 after the economy sunk into recession due to the financial crisis. After some time, the Fed injected more money into the economy by purchasing Treasury and mortgage-backed securities. Between 2009 and 2014, the Federal Reserve made large-scale asset purchases, known as quantitative easing, which increased the size of the Fed’s balance sheet to $4.5 trillion in October 2014.
“The more probable scenario is we are at some point going to be in a bout of huge inflation or we’re going to be back in a bad recession,” Hensarling said. “They have a huge balance sheet that they have to unwind and depending on if you unwind it too quickly, if you unwind it too slowly, you could either end up with high inflationary pressures or you could throw the economy back into a recession.”