Balance-Sheet Normalization and the Next Recession

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Balance-Sheet Normalization and the Next Recession

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Tani Fukui Jason Chen
FEB 23, 2022

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Key Takeaways

  • We believe the Fed’s balance sheet normalization process carries underappreciated risks.
  • The assumption of a benign balance sheet runoff is dependent on a single historical example in 2017-2019.
  • A recession could take place before the balance sheet runoff is adequately completed or sufficient rate hikes have been made.
  • We expect elevated market volatility as the balance-sheet normalization process remains a poorly understood tool.