The Federal Reserve is reducing the size of its $9 trillion bond program, which may impact your investment portfolio.

• During emergencies, the US central bank has the power to produce money to support the financial industry.
• Investors have shifted towards riskier investments due to the Federal Reserve's $9 trillion balance sheet.
• As the Fed sells or matures its bonds, analysts predict that assets will be repriced.

The Federal Reserve is considering how quickly to reduce its portfolio of bonds without causing a recession, as its balance sheet is almost $9 trillion and most of its assets are securitized holdings of government debt and mortgages.

The U.S. central bank has long used its power as a lender of last resort to add liquidity to markets during times of distress. When the central bank buys bonds, it can push investors toward riskier assets. The Fed's policies have boosted U.S. equities despite tough economic conditions for small businesses and ordinary workers. Kathryn Judge, a professor at Columbia Law, says the Fed's stimulus is like grease for the gears of the financial system. However, if the Fed applies too much grease too frequently, there are concerns that the overall machinery becomes risk-seeking and fragile in alternative ways. Analysts believe that the Fed's choice to raise interest rates in 2022 then quickly reduce the balance sheet could set off a recession as riskier assets are repriced.

The Fed's monetary policies may increase the risk of a recession, as shown in the video.