A Brief Chronicle of the Federal Reserve’s First Balance Sheet Contraction

A top Federal Reserve official said the central bank is strongly committed to taking steps that will reduce inflation this year, including by approving significant reductions in its $9 trillion asset portfolio at its policy meeting early next month. Fed governor Lael Brainard, who is awaiting Senate confirmation to serve as the Fed’s vice chairwoman, said she anticipated shrinking the asset portfolio—sometimes referred to as a “balance sheet”—and a series of interest-rate increases to move the Fed’s policy stance to a more neutral position that no longer provides stimulus to the economy later this year.

“It is of paramount importance to get inflation down,” Ms. Brainard said Tuesday at a virtual conference hosted by the Federal Reserve Bank of Minneapolis. “Accordingly, the committee will continue tightening monetary policy methodically through a series of interest-rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”

- The Wall Street Journal, April 5, 2022

If we follow the threads underlying inflation over the past year to their earliest beginnings, they run straight through the fog of pandemic, quickly pass by the financial crisis in 2008, and wind their way past the Great Inflation of the 1970s and the Fed-Treasury Accord twenty years before that, and stretch all the way back to the time when Captain Harry S. Truman, only recently returned from commanding an artillery battery during the Great War, opened Truman & Jacobson on the ground floor of the Glennon Hotel at 104 West 12th Street, in Kansas City, Missouri. It was late November, 1919.

From the moment it opened its doors, Truman & Jacobson reflected the dapper young man who would become president a quarter of a century later. The front entrance stood just below the name Truman & Jacobson in colored letters, and between two large glass windows, which displayed dozens of silk shirts and hats, along with scores of detachable collars arranged in vertical columns. Inside the doors, long glass display cases ran the length of the store and were filled with shirts, leather gloves and belts, socks, collar pins, and cufflinks. There was also a long row of hanging silk neckties in every color and pattern imaginable, which ran the length of the store on the left, behind the display cases. Behind the ties, boxes of shirts and everything else for sale in the store lined the walls.

To finance the remodeling of the space, the $350 monthly rent, and the $35,000 worth of inventory in its display cases and lining its walls, Harry had put in $15,000 of his own money. His partner Eddie Jacobson also contributed, but they also borrowed from the bank.