The Fed’s Balance Sheet and Quantitative Tightening

The Fed’s Balance Sheet and Quantitative Tightening

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Updated June 24, 2024
The Fed’s Balance Sheet and Quantitative Tightening
The size and composition of the Federal Reserve’s (Fed’s)
group of large broker-dealers active in Treasury markets.
balance sheet is a product of its monetary policy and lender-
When the Fed purchases securities from primary dealers, it
of-last-resort actions. The Fed has responded to past crises
increases bank reserves (discussed below), increasing the
by increasing its balance sheet, which peaked at 10 times its
overall liquidity of the financial system.
size before the 2008 financial crisis. As part of the post-
The Fed can also provide primary dealers and foreign
crisis normalization of monetary policy, the Fed began to
central banks with temporary liquidity through repurchase
reduce the size of its balance sheet in June 2022—to date,
agreements (repos). In a repo, the Fed temporarily
by more than $1.5 trillion (or 18%) from its peak size.
purchases a Treasury security or MBS with an agreement to
Balance Sheet Primer
reverse the sale in the near future. In 2021, the Fed made
The Fed’s balance sheet can be described in standard
repo lending on demand permanently available by creating
accounting terms. It earns income on its assets and pays
its Standing Repurchase Agreement Facility.
interest and dividends on its liabilities and capital. Its assets
In crises, the Fed lends to banks through its discount
are equal in value to its liabilities and capital (see Table 1).
window and creates emergency programs to stabilize
Its net income (i.e., the difference between income and
expenses) is comparable to a company’s profits
financial markets. Through these programs, it makes or
or losses.
acquires loans and acquires private securities that are also
Table 1. Simplified Federal Reserve Balance Sheet
held as assets on its balance sheet. These assets swell
during crises and then shrink relatively quickly as financial
January 3, 2024, Tril ions of $
conditions normalize. The Fed also lends dollars to foreign
Liabilities and
central banks in crises through foreign currency swaps.
Assets

Capital

Liabilities
Treasury Securities
$4.8
Currency
$2.3
Just as the Fed increases market liquidity through repos, it
can reduce liquidity through reverse repos, in which the
MBS
$2.4
Bank Reserves
$3.5
Fed temporarily sells securities to market participants and
Loans/Emergency
$0.2
TGA
$0.7
foreign central banks in exchange for cash. In 2014, the Fed
Facilities
institutionalized reverse repos by creating the Overnight
Reverse Repurchase Agreement Facility. The Fed pays
Repos
$0
Reverse Repos
$1.1
market participants an interest rate on reverse repos, which
Liquidity Swaps
<$0.1
Remittances Due to
-$0.1
helps the Fed maintain its monetary policy rate targets.
Treasury
Banks hold reserves in accounts at the Fed to make and
Other
$0.3
Other
$0.2
receive payments from other banks. These bank reserves

Total Liabilities
$7.6
are liabilities to the Fed. Similar to reverse repos, the Fed
pays banks interest on reserves that helps the Fed maintain

Paid-In Capital
<$0.1
its interest rate targets. Mechanically, when the Fed
purchases a security or makes a loan, it finances it by

Surplus
<$0.1
creating new bank reserves. As a result, the asset and
Total
$7.7
Total
$7.7
liability sides of the balance sheet increase by an identical
amount so that assets always equal liabilities plus capital.
Source: CRS calculations based on Federal Reserve data.
Note: Total for emergency facilities include Treasury capital
The U.S. Treasury also holds its cash balances at the Fed in
investments. Totals may not sum due to rounding.
the Treasury General Account (TGA). When the
Assets
Treasury receives revenue, its balance increases, and when
it makes payments, its balance decreases. The Fed issues
Most assets on the Fed’s balance sheet are financial
paper currency (cash), officially called Federal Reserve
securities. The Fed is permitted by law to buy or sell a
notes. A Federal Reserve note is an IOU from the Fed that
narrow range of securities and must do so on the open
pays no interest, making it a liability on the balance sheet.
market (referred to as open market operations). In
practice, it purchases mainly Treasury securities and
Capital
mortgage-backed securities (MBS) that are guaranteed by
The Fed’s capital is equal in value to the difference between
a federal agency or a government-sponsored enterprise
its assets and liabilities. It takes two forms. First, private
(GSE). The open market requirement means that the Fed
banks that are members of the Fed must purchase stock in
cannot purchase Treasury securities directly from the U.S.
the Fed, called paid-in capital. Membership is required for
Treasury, instead transacting with primary dealers, a
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link to page 2 The Fed’s Balance Sheet and Quantitative Tightening
nationally chartered banks and optional for state-chartered
2014 to 2018, the Fed kept the size of its balance sheet
banks. Unlike common stock in a private company, this
steady by rolling over maturing assets (i.e., reinvesting the
stock does not confer ownership control and pays a
principal from assets that had matured). Beginning in 2018,
dividend set by statute. However, it does provide the banks
the Fed gradually reduced its balance sheet by allowing
with seats on the boards of the 12 Fed regional banks. The
maturing assets instead to roll off the balance sheet up to a
dividend is a fixed 6% for banks with under $10 billion in
fixed amount (i.e., no longer reinvesting principal). In 2019,
assets and the lesser of 6% or the prevailing 10-year
repo market volatility convinced the Fed that more bank
Treasury yield for banks with over $10 billion. The other
reserves were needed to operate its ample reserves
form of capital is the Fed’s surplus. It comes from retained
framework, so it began making repos and purchasing assets,
earnings and is currently capped by statute at $6.825
again increasing the balance sheet. When the COVID-19
billion. Through a series of recent acts, Congress first
pandemic began, the pace of repo lending and asset
capped the surplus and then reduced the cap as a “pay for”
purchases increased and emergency facilities were
(budgetary offset) for unrelated legislation.
reintroduced, causing faster balance sheet growth.
Net Income and Remittances
Table 2. Federal Reserve Balance Sheet Trends
Tril ions of Dol ars, 2008-2022
The Fed earns income on its loans, repos, and securities,
along with fees it charges. These finance its expenses,
Event (Dates)
End Size
Change
which include operating expenses and the interest paid on
bank reserves and repos. The difference between income
Financial Crisis (9/08-12/08)
$2.2
+$1.3
and expenses is called net income. Net income is used
QE1 (3/09-5/10)
$2.3
+$0.4
exclusively to (1) pay statutorily required dividends to
shareholders, (2) increase the surplus when it is below its
QE2 (11/10-7/11)
$2.9
+$0.6
statutory cap, and (3) pay remittances to Treasury, which
are added to the federal government’s general revenues.
QE3 (10/12-10/14)
$4.5
+$1.7
Rol Off (9/17-8/19)
$3.8
-$0.7
From 2008 to 2022, net income and remittances increased
significantly. Since September 2022, its net income has
Repo Turmoil (9/19-2/20)
$4.2
+$0.4
been negative, because the interest rates it pays on bank
COVID-19 (3/20-5/22)
$8.9
+$4.8
reserves and reverse repos became higher than the yield on
the securities it holds. As a result, its remittances to the
Source: CRS calculations based on Federal Reserve data.
Treasury have fallen close to zero for the first time since
In November 2021, responding to high inflation, the Fed
1934. But unlike a private company, under the Fed’s
announced that it would taper off its asset purchases (i.e.,
accounting conventions, negative net income does not
purchase fewer assets per month). In March 2022, it ended
reduce its capital, cause it to become insolvent, or require a
asset purchases, at which point the balance sheet had more
capital infusion to maintain solvency. Instead, it registers
than doubled from its pre-pandemic size. In this episode,
the losses as a deferred asset. Remittances will not resume
both bank reserves and reverse repos grew rapidly on the
until the deferred asset is drawn down after net income
liability side of the balance sheet. In June 2022, the Fed
becomes positive again, which will occur once the yield on
began to shrink its balance sheet, popularly called
its assets exceeds the interest rate on its liabilities.
quantitative tightening (QT). Under QT, it had been
Quantitative Easing and Tightening
allowing a capped amount of maturing Treasury securities
Before the 2008 financial crisis, the Fed’s balance sheet
and MBS to roll off the balance sheet each month. To date,
grew modestly over time. During that crisis, the Fed created
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. Beginning in June 2024,
wanted to provide more monetary stimulus after reducing
the Fed reduced the run off pace for Treasury securities to
interest rates to zero. For the first time, it made monthly
up to $25 billion per month, keeping MBS runoffs at $35
large-scale asset purchases, popularly called quantitative
billion. The Fed intends to permanently maintain a large
balance sheet and “intends to slow and then stop the decline
easing (QE), at a preannounced rate that also caused the
balance sheet to increase rapidly. The Fed purchased
in the size of the balance sheet when reserve balances are
Treasury securities and debt and MBS issued by
somewhat above the level … consistent with ample
reserves.” It has not yet indicated what it expects that level
government agencies and GSEs. The increase in assets was
matched by an increase in liabilities—mainly bank reserves,
to be or when QT will end.
which were kept at the minimum level needed to meet
The goals of QE were to stimulate the economy by reducing
reserve requirements before the financial crisis but
long-term interest rates and to provide additional liquidity
afterwards topped $1 trillion. Since the crisis, the Fed has
to the financial system. QE reduced long-term interest rates
conducted monetary policy under an ample reserves
by driving down yields on the securities the Fed was
framework, where it creates so many reserves that banks’
purchasing, which led to lower interest rates throughout the
demand for reserves does not influence market interest
economy. The reduction in yields on MBS translated to
rates. In the long run, the Fed decides how many securities
lower mortgage rates, stimulating housing demand. QE
to hold based on the reserves needed under this framework.
increased liquidity by increasing bank reserves.
QE occurred in three rounds between 2009 and 2014, as the
Marc Labonte, Specialist in Macroeconomic Policy
recovery from the financial crisis was initially weak. From
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The Fed’s Balance Sheet and Quantitative Tightening

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