The Federal Reserve's looming attempt to shrink its mammoth portfolio of bonds comes with an ugly track record: Virtually every time the central bank has tried it in the past, recessions have followed.
Over the past several months, the Fed has prepared markets for the upcoming effort to reduce the $4.5 trillion it currently holds of mostly Treasurys and mortgage-backed securities. The balance sheet ballooned as the Fed sought to stimulate the economy out of its financial crisis morass.
The Fed has embarked on six such reduction efforts in the past — in 1921-1922, 1928-1930, 1937, 1941, 1948-1950 and 2000.
Of those episodes, five ended in recession, according to research from Michael Darda, chief economist and market strategist at MKM Partners. The balance sheet trend mirrors what has happened much of the time when the Fed has tried to raise rates over a prolonged period of time, with 10 of the last 13 tightening cycles ending in recession.
"Moreover, outside of the 1920s and 1930s, there is no precedent for double-digit annual declines in the balance sheet/base that will likely begin to occur late next year," Darda said in a note.
Indeed, the Fed's efforts have been unprecedented.
Three rounds of purchases through a program known as quantitative easing or, more colloquially, "money printing," brought the balance sheet to his level. Recently revealed plans show how the Fed will scale back.