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INSIGHTi
Federal Reserve: Tapering of Asset Purchases
November 4, 2021
On November 3, 2021, the Federal Reserve (Fed) announced that it would begin to “taper” its large-scale
asset purchases, popularly known as “quantitative easing” (QE). It announced it would reduce these asset
purchases by $15 billion per month to $70 billion of Treasury securities and $35 billion of agency
mortgage-backed securities (MBS) in November. If that pace is maintained, purchases would end in June
2022. Under tapering, the Fed’s balance sheet will continue to grow but more slowly.
Tapering is the first step in the eventual “normalization” of monetary policy from the highly stimulative
policies in response to COVID-19, which included asset purchases. This Insight discusses why the Fed
has purchased assets and what tapering might mean for future monetary policy.
History of Asset Purchases
QE was first used in three rounds between 2008 and 2012 in response to the financial crisis when the Fed
purchased Treasury securities, MBS, and agency debt. Tapering was first used in 2013 to wind down
QE3, and the surprise caused Treasury yields to rise and financial volatility in emerging markets
(popularly called the “taper tantrum”).
The Fed holds securities it buys as assets on its balance sheet and has financed its purchases by expanding
its liabilities by an equal amount. Securities held by the Fed increased from $0.8 trillion before the
financial crisis to $4.2 trillion by the end of 2014, as seen in Figure 1. Bank reserves held at the Fed are
the primary liability that has increased over this period. While the Fed has not literally “printed money” to
finance these purchases, increasing bank reserves has a similar effect, as bank reserves are part of the
monetary base. Bank reserves have increased from $40 billion at the beginning of 2008 to $4.1 trillion at
present.
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Figure 1. Federal Reserve Balance Sheet: Assets
Source: CRS calculations based on Federal Reserve data.
In the fall of 2019, a liquidity shortage caused repo market turmoil, prompting the Fed to begin
purchasing Treasuries again. Asset purchases rapidly increased in response to financial unrest caused by
the pandemic’s onset in the spring of 2020, with securities holdings increasing by about $2 trillion in two
months. MBS purchases resumed then, and for the first time the Fed purchased agency CMBS (MBS
backed by commercial mortgages) in relatively small amounts. Beginning in June 2020, the Fed
purchased $120 billion of securities per month—a faster rate than the rounds of QE following the
financial crisis. In December 2020, it pledged to continue purchases at this rate “until substantial further
progress has been made toward its maximum employment and price stability goals.” Since then, the
unemployment rate fell from 6.7% to 4.8% and the Fed’s targeted inflation measure rose from 1.3% to
4.3%. Since March 2020, the Fed’s securities holdings have doubled to $8 trillion.
The Fed’s Rationales for QE
During every period of asset purchases except 2019 to March 2020, the federal funds rate (a short-term
interest rate that is the main target of monetary policy) was near zero. QE allowed the Fed to provide
additional stimulus by reducing Treasury and mortgage rates when short-term rates were constrained by
the “zero lower bound” when the economy faced deep recessions. A reduction in those rates would be
expected to feed through to other long-term rates throughout the financial system, thus boosting interest-
sensitive spending, which most studies have confirmed. In the pandemic, the Fed also emphasized the
effects of QE on reviving liquidity in stressed financial markets. Boosting overall bank reserves helps
ensure that individual banks maintain adequate liquidity. In addition, the financial crisis originated with a
crisis in mortgage markets and featured financial distress at Fannie Mae and Freddie Mac. Purchasing
agency debt and MBS helped relieve stress in mortgage markets more directly. By contrast, today housing
markets are generally booming.
Policy Implications of Tapering
Tapering is the first step in the normalization process, as the Fed withdraws stimulus in the recovery.
Tapering itself withdraws some stimulus, and its pace is also likely to determine when the Fed begins
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raising interest rates. The Fed can raise the federal funds rate at any time; market participants expect it
will wait until tapering has ended, consistent with past practices. If so, the Fed’s current tapering plans
mean that the earliest it would increase the federal funds rate is mid-2022.
How quickly should the Fed normalize monetary policy? Although QE increases the monetary base,
which can theoretically lead to higher inflation, this did not occur as some critics feared after the financial
crisis. Instead, inflation was generally below target before the pandemic. However, inflation has been
modestly above the Fed’s target in 2021. In the Fed’s view, the rise in inflation is transitory and does not
require policy to be tightened more quickly, given the economy has not yet returned to full employment
and the pandemic continues. Some critics would like the Fed to wait until the pandemic is over to begin
tapering. Others see little justification for continuing asset purchases—a tool intended for crises—during
a financial boom and high inflation and fear that the slow pace of tapering has put the Fed behind the
curve in maintaining price stability.
The Fed’s permanently larger balance sheet also raises broader policy issues: Is it appropriate for the Fed
to hold a significant share of the federal debt and MBS outstanding? Is it appropriate for the Fed to pay
banks interest on reserves and operating standing repo facilities in order to make interest rate control in
the presence of a large balance sheet possible? Because of the Fed’s independence, Congress does not
interfere with specific monetary policy decisions, and it is difficult to devise legislative constraints on
future asset purchases or the balance sheet that would not impinge on the Fed’s independence.
Furthermore, the Fed needs the authority to buy and hold some types of securities for normal monetary
operations outside of QE. Some past proposals would have revoked its authority to purchase MBS or
allowed MBS purchases in crisis conditions only.
Author Information
Marc Labonte
Specialist in Macroeconomic Policy
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
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