news of this week’s federal reserve meeting continues to be the hot topic in the business community with headlines highlighting a quarter percentage point increase in interest rates a critical component worthy of discussion is the fed’s strategy to reduce the size of its balance sheet thereby reducing liquidity in the economy interest rates are important but watch the balance and liquidity flows not only do the efforts to shrink the fed’s 9 billion balance sheet contribute to increased rates they also directly impact the amount of lending and investable savings in the market a recent article in barron’s addressed this issue stating that “central bankers signaled they may start winding down the balance sheet sooner and more aggressively than markets have expected” this is what people need to be looking out for – what plan does the fed have to reduce the liquidity in the system clearly that is what is driving inflation asset value low longterm rates and sending the economy into a frenzy for business owners specifically it will be key to monitor and pay close attention to how this might impact their business and finances in the near future liquidity in the marketplace on the feds balance sheet speaks to the amount of money supply that is currently out chasing goods while more money in the system seems good it ultimately inflates the value of our currency in 2008 there was a tremendous liquidity crisis and the fed had to triple the size of the balance sheet – the pandemic hits just when it was starting to unwind so for the past 14 years weve been in an economy where liquidity keeps going up and potentially now for the first time were going to see it go in reverse what we do know at this point is there will be winners and losers and if you are overleveraged it will be a tough journey ahead with a contraction in liquidity our money supply begins to taper ultimately reducing inflationary pressure we are in a unique environment today that we haven’t seen before for context in 2017 the fed balance sheet was half the size it is today and while a shift to a less liquid higher interest rate seems risky this will move us toward a more normal balanced environment specifically in the real estate sector we’ve seen investors flood the housing market looking to leverage the highly liquid low interest rate environment while there are short term benefits local economies ultimately miss out on the multiplier effect that results from new homebuyers that would otherwise make housing purchases and then spend to make it a home we cannot sustain the volatility we have been seeing over the past two years and while lower interest rates might seem like a good thing the outcome of that is inflation being at a 40year high the fact is whether the fed raises shortterm rates 25 basis points 50 basis points or even 100 basis points – what will matter for the business owner is if you go to a bank for a loan and your lack of liquidity combined with increased costs of higher interest rates disqualifies you for a loan business owners will have to respond by navigating through a contraction in the money supply along with an increase in the cost of capital these changing factors may be either harmful or helpful for your business and are why stress testing through different environments is key ultimately the fed navigated an extremely challenging environment in a methodical way  it unleashed liquidity into the marketplace to help us navigate a global pandemic which sent the entire world into lockdown looking forward we now need to focus on the recovery and what it takes to get back to a new normal  and that is by reducing the 9 trillion balance sheet that said it is important to bear in mind that this reduction process is going to put unique stresses on the economy and businesses it isn’t a quick fix and it will be crucial for business owners to ensure their own balance sheet can withstand the changing environment ahead