Summary

• Late last year, the Federal Reserve ended its latest quantitative tightening (QT) program: the process by which it shrinks its balance sheet by selling securities or letting them mature without reinvestment.
• From a peak size of almost $9 trillion, or roughly 35% of U.S. GDP, the Fed had reduced the balance sheet by more than $2 trillion.
• Since the GFC, the Fed has relied on balance sheet expansion to mitigate the limits of the effective lower bound on interest rates and provide further monetary accommodation.
• Given the link between bank reserves and deposits, the Fed’s balance sheet is likely to keep gradually expanding over time, even in the absence of asset-purchase programs (quantitative easing, or QE).
• The Fed appears to be on its way to implementing policies that seek to reduce banks’ demand for reserves.

Late last year, the Federal Reserve ended its latest quantitative tightening (QT) program: the process by which it shrinks its balance sheet by selling securities or letting them mature without reinvestment. From a peak size of almost $9 trillion, or roughly 35% of U.S. GDP, the Fed

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