From ample to agile – the US Fed’s path to a leaner balance sheet
The Federal Reserve is considering a balance sheet reduction, facing challenges that could impact financial stability and funding markets.
The Federal Reserve, under Chairman Kevin Warsh, is considering a gradual reduction of its balance sheet, currently at approximately $6.7 trillion—21% of GDP. This process may face challenges, including the need for consensus among Federal Open Market Committee members and potential risks to financial market stability.
Efforts to shrink the balance sheet are complicated by the Fed’s ample-reserves policy and the elevated holdings of banks. Significant reductions in Treasury and mortgage-backed securities are constrained by the risks they pose to funding markets and housing affordability. The Fed’s Treasury holdings peaked at $5.8 trillion in June 2022 and have since decreased to $4.2 trillion, while agency MBS holdings have declined from $2.7 trillion to $2 trillion.
The Treasury General Account, which remains between $800 billion and $1 trillion, also requires careful management in consultation with the Treasury. Any changes to the TGA could impact funding markets and necessitate new facilities to ensure stability.
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