Interest rate is a price tool, and the balance sheet is a quantitative tool, respectively affect the price and quantity of funds.
It can be divided into price tools and quantitative policy tools.
Specifically, price-based monetary policy tools include excess reserve policy and policy, which mainly conduct macro control through asset price changes, and transmit to micro subject’s borrowing costs and income expectations, thus exerting an impact on the economy.
Quantitative monetary policy tools mainly include statutory deposit reserve rate, operation, rediscount policy and so on, adjusting to affect market liquidity.
The increase mainly refers to changes in the target federal funds rate, the rate at which banks lend to each other overnight.
After setting the Federal funds target rate, the Federal Reserve makes the federal funds rate close to the target rate through open market operations, and then affects the short-term borrowing costs and regulates liquidity and the economy.
Shrinking the balance sheet means the Fed holds assets that do not mature, and as more assets mature, the size of the balance sheet will be gradually reduced.
It is worth noting that while shrinking the balance sheet reduces the securities assets of the Federal Reserve, it will also reduce the stock of excess reserves in the liabilities of the Federal Reserve. The simultaneous sterilization of liquidity provided by these maturing assets will directly affect liquidity.
The increase in interest rate directly affects the short end interest rate, the inter-bank overnight lending rate and then the long end interest rate.
Due to the active market transactions, the interest rate transmission speed has a short effect.
The speed of balance sheet reduction is related to the size of maturing assets. Since the Federal Reserve holds assets with different maturities, balance sheet reduction will be a long-term process, and the impact on liquidity will also be related to the amount of maturing assets.
From the perspective of the impact on the overall economic activity, the impact of interest rate increase is relatively greater, while the impact of balance sheet reduction is mainly concentrated on the liquidity level, which has a very indirect impact on the economy.
Specifically, the interest rate increase directly affects the borrowing cost of funds through the interest rate, which will inhibit the willingness of individuals and real enterprises to borrow, and the overall economic activity will be affected.
Shrinking the balance sheet reduces the liquidity of the money market and has a very indirect impact on the real economy.
The dollar hit its lowest level since January, gold breached 1,820 and oil rose to its highest level in nearly two months.
Please pay attention to the specific operation, the market is changing rapidly, investment needs to be cautious, the operation strategy is for reference only.