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Updated February 6, 2024
The Fed’s Balance Sheet and Quantitative Tightening
The size and composition of the Federal Reserve’s (Fed’s)
Treasury, instead transacting with primary dealers, a
balance sheet is a product of its monetary policy and lender-
group of large broker-dealers active in Treasury markets.
of-last-resort decisions. The Fed has responded to crises by
increasing its balance sheet, which is now 10 times larger
When the Fed purchases securities from primary dealers, it
than it was before the 2008 financial crisis. As part of its
increases bank reserves (discussed below), increasing the
efforts to tighten monetary policy, the Fed began to reduce
overall liquidity of the financial system. The Fed can also
the size of its balance sheet in June 2022.
provide primary dealers and foreign central banks with
temporary liquidity through repurchase agreements (repos).
Balance Sheet Primer
In a repo, the Fed temporarily purchases a Treasury security
The Fed’s balance sheet can be described in standard
or MBS with an agreement to reverse the sale in the near
accounting terms. It earns income on its assets and pays
future. In 2021, the Fed made repo lending on demand
interest and dividends on its liabilities and capital. Its assets
permanently available by creating its Standing
are equal in value to its liabilities and capital (see Table 1).
Repurchase Agreement Facility.
Its net income (i.e., the difference between income and
expenses) is comparable to a company’s profits or losses.
In crises, the Fed lends to banks through its discount
window and creates emergency programs to stabilize
Table 1. Simplified Federal Reserve Balance Sheet
financial markets. Through these programs, it makes or
January 3, 2024, Tril ions of $
acquires loans and acquires private securities that are also
held as assets on its balance sheet. These assets swell
Liabilities and
during crises and then shrink relatively quickly as financial
Assets
Capital
conditions normalize. The Fed also lends dollars to foreign
central banks in crises through foreign currency swaps.
Treasury Securities
$4.8
Currency
$2.3
MBS
$2.4
Bank Reserves
$3.5
Liabilities
Just as the Fed increases market liquidity through repos, it
Loans/Emergency
$0.2
TGA
$0.7
can reduce liquidity through reverse repos, in which the
Facilities
Fed temporarily sells securities to market participants and
Repos
$0
Reverse Repos
$1.1
foreign central banks in exchange for cash. In 2014, the Fed
institutionalized reverse repos by creating the Overnight
Liquidity Swaps
<$0.1
Remittances Due to
-$0.1
Reverse Repurchase Agreement Facility. The Fed pays
Treasury
market participants an interest rate on reverse repos, which
Other
$0.3
Other
$0.2
helps the Fed maintain its monetary policy rate targets.
Total Liabilities
$7.6
Banks hold reserves in accounts at the Fed to make and
receive payments from other banks. These bank reserves
Paid-In Capital
<$0.1
are liabilities to the Fed. Similar to reverse repos, the Fed
Surplus
<$0.1
pays banks interest on reserves that helps the Fed maintain
its interest rate targets. Mechanically, when the Fed
Total
$7.7
Total
$7.7
purchases a security or makes a loan, it finances it by
Source: CRS calculations based on Federal Reserve data.
creating new bank reserves. As a result, the asset and
Note: Total for emergency facilities include Treasury investments.
liability sides of the balance sheet increase by an identical
Totals may not sum due to rounding.
amount so that assets always equal liabilities plus capital.
Assets
The U.S. Treasury also holds its cash balances at the Fed in
Most assets on the Fed’s balance sheet are financial
the Treasury General Account (TGA). When the
securities. The Fed is permitted by law to buy or sell a
Treasury receives revenue, its balance increases, and when
narrow range of securities and must do so on the open
it makes payments, its balance decreases. The Fed issues
market (referred to as open market operations). In
paper currency (cash), officially called Federal Reserve
practice, it purchases mainly Treasury securities and
notes. A Federal Reserve note is an IOU from the Fed to its
mortgage-backed securities (MBS) that are guaranteed by
bearer that pays no interest, making it a liability on the
a federal agency or a government-sponsored enterprise
balance sheet.
(GSE). The open market requirement means that the Fed
cannot purchase Treasury securities directly from the U.S.
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link to page 2 The Fed’s Balance Sheet and Quantitative Tightening
Capital
framework, where it creates so many reserves that banks’
The Fed’s capital is equal in value to the difference between
demand for reserves do not influence market interest rates.
its assets and liabilities. It takes two forms. First, private
In the long run, the Fed decides how many securities to
banks that are members of the Fed must purchase stock in
hold based on the reserves needed under this framework.
the Fed, called paid-in capital. Membership is required for
nationally chartered banks and optional for state-chartered
QE occurred in three rounds between 2009 and 2014, as the
banks. Unlike common stock in a private company, this
recovery from the financial crisis was initially weak. From
stock does not confer ownership control and pays a
2014 to 2018, the Fed kept the size of its balance sheet
dividend set by statute. However, it does provide the banks
steady by rolling over maturing assets (i.e., reinvesting the
with seats on the boards of the 12 Fed regional banks. The
principal from assets that had matured). Beginning in 2018,
dividend is a fixed 6% for banks with under $10 billion in
the Fed gradually reduced its balance sheet by allowing
assets and the lesser of 6% or the prevailing 10-year
maturing assets instead to roll off the balance sheet up to a
Treasury yield for banks with over $10 billion.
fixed amount (i.e., no longer reinvesting principal). In 2019,
repo market volatility convinced the Fed that more bank
The other form of capital is the Fed’s surplus. It comes
reserves were needed to operate its ample reserves
from retained earnings and is currently capped by statute at
framework, so it began making repos and purchasing assets,
$6.825 billion. Through a series of recent acts, Congress
again increasing the balance sheet. When the COVID-19
first capped the surplus and then reduced the cap as a “pay
pandemic began, the pace of repo lending and asset
for” (budgetary offset) for unrelated legislation.
purchases increased and emergency facilities were
reintroduced, causing faster balance sheet growth.
Net Income and Remittances
Table 2. Federal Reserve Balance Sheet Trends
The Fed earns income on its loans, repos, and securities,
Tril ions of Dol ars, 2008-2022
along with fees it charges. These finance its expenses,
which include operating expenses and the interest paid on
Event (Dates)
End Size
Change
bank reserves and repos. The difference between income
and expenses is called net income. Net income is used
Financial Crisis (9/08-12/08)
$2.2
+$1.3
exclusively to (1) pay statutorily required dividends to
QE1 (3/09-5/10)
$2.3
+$0.4
shareholders; (2) increase the surplus when it is below its
statutory cap; and (3) pay remittances to Treasury, which
QE2 (11/10-7/11)
$2.9
+$0.6
are added to the federal government’s general revenues.
QE3 (10/12-10/14)
$4.5
+$1.7
Remittances have not been zero since 1934. From 2008 to
Rol Off (9/17-8/19)
$3.8
-$0.7
2022, net income and remittances increased significantly.
Since September 2022, its net income has been negative
Repo Turmoil (9/19-2/20)
$4.2
+$0.4
because the interest rates it pays on bank reserves and
COVID-19 (3/20-5/22)
$8.9
+$4.8
reverse repos became higher than the yield on the securities
it holds. As a result, its remittances to the Treasury have
Source: CRS calculations based on Federal Reserve data.
fallen close to zero. But unlike a private company, under
In November 2021, responding to high inflation, the Fed
the Fed’s accounting conventions, negative net income does
announced that it would taper off its asset purchases (i.e.,
not reduce its capital, cause it to become insolvent, or
purchase fewer assets per month). In March 2022, it ended
require a capital infusion to maintain solvency. Instead, it
asset purchases, at which point the balance sheet had more
registers the losses as a deferred asset. Remittances will not
than doubled from its pre-pandemic size. In this episode,
resume until the yield on its assets exceeds the interest rate
both bank reserves and reverse repos grew rapidly on the
on its liabilities, causing its net income to become positive
liability side of the balance sheet. In June 2022, the Fed
again, at which point the deferred asset is drawn down.
began to shrink its balance sheet, popularly called
Quantitative Easing and Tightening
quantitative tightening (QT). Under QT, it is currently
allowing up to $60 billion of Treasury securities and $35
Before the 2008 financial crisis, the Fed’s balance sheet
billion of MBS to roll off the balance sheet each month. To
grew modestly over time. During that crisis, the Fed created
date, Treasury redemptions have hit the cap, but MBS
a number of emergency lending programs that caused its
redemptions have been lower because households are
balance sheet to balloon (see Table 2). In addition, the Fed
holding on to low-rate mortgages. The Fed intends to
wanted to provide more monetary stimulus after reducing
permanently maintain a large balance sheet and “intends to
interest rates to zero. For the first time, it made monthly
slow and then stop the decline in the size of the balance
large-scale asset purchases, popularly called quantitative
sheet when reserve balances are somewhat above the level
easing (QE), at a preannounced rate that also caused the
… consistent with ample reserves.” It has not yet indicated
balance sheet to increase rapidly. The Fed purchased
what it expects that level to be or when QT will end.
Treasury securities and debt and MBS issued by
government agencies and GSEs. The increase in assets was
The goals of QE were to stimulate the economy by reducing
matched by an increase in liabilities—mainly bank reserves,
long-term interest rates and to provide additional liquidity
which were kept at the minimum level needed to meet
to the financial system. QE reduced long-term interest rates
reserve requirements before the financial crisis but
by driving down yields on the securities the Fed was
afterwards topped $1 trillion. Since the crisis, the Fed has
purchasing, which led to lower interest rates throughout the
conducted monetary policy under an ample reserves
economy. The reduction in yields on MBS translated to
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The Fed’s Balance Sheet and Quantitative Tightening
lower mortgage rates, stimulating housing demand. QE
Marc Labonte, Specialist in Macroeconomic Policy
increased liquidity by increasing bank reserves.
IF12147
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