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The Mechanics of Fed Balance Sheet Normalization
The Federal Open Market Committee (FOMC) began reducing the size of the Federal Reserve's balance sheet in June 2022. This policy, termed balance sheet "normalization" or "quantitative tightening" (QT), is designed to drain excess liquidity from the banking system. QT is the opposite of quantitative easing (QE). This essay looks at where the Fed stands in terms of QT and what should be considered going forward. Assets on the Fed's balance sheet reached an historic peak of $8.96 trillion in April 2022 (36% of GDP), following expansionary policies designed to mitigate the negative economic effects of the pandemic. ... (full story)