The Federal Reserve's Balance Sheet Expansion Is Now a Permanent Feature of Monetary Policy

Bank reserves and deposits are linked in a way that ensures the Federal Reserve's balance sheet will likely keep expanding gradually over time. This expansion occurs even without active asset-purchase programs. The Fed ended its latest quantitative tightening program late last year, which had reduced the balance sheet by more than $2 trillion from a peak of almost $9 trillion, or roughly 35% of U.S. GDP. Since the global financial crisis, the the Fed has used balance sheet expansion to provide monetary accommodation when interest rates cannot be lower than the effective lower bound. The Fed is now implementing policies that seek to reduce banks' demand for reserves.