Finance and Economics Discussion Series (FEDS)
March 2026
A User's Guide to Reducing the Federal Reserve's Balance Sheet
Alyssa G. Anderson, Alessandro Barbarino, Anthony M. Diercks, and Stephen Miran
Abstract:
For the avoidance of doubt: 1) This catalog presents and analyzes a variety of options for reducing the Federal Reserve's balance sheet. Nothing here is an endorsement of any specific policy option; this is a menu of options. Combined, we estimate these options open the door to balance sheet reduction of $1.2 to $2.1 trillion within the Fed's current ample reserves framework. While we do not advocate for or against a return to a scarce reserves regime, further reductions would be possible with a return to scarce reserves. 2) The process of materially shrinking the balance sheet would require a great deal of implementation and rulemaking work in advance and would take time, at least a year and quite possibly several, before the Fed can begin shrinking its balance sheet. If undertaken, there are good reasons for moving slowly and gingerly, and to take steps to ensure financial markets are able to absorb the reissue of securities that roll off the Federal Reserve's balance sheet.
Keywords: Federal Reserve Balance Sheet, Quantitative Tightening, Reserve Management, Monetary Policy Implementation
DOI: https://doi.org/10.17016/FEDS.2026.019
PDF: Full Paper
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