The Fed’s Balance Sheet Grew by $3 Trillion in a Year — Now It Must Shrink

The Federal Reserve’s balance sheet grew by $3 trillion in March 2020. That expansion was driven by large-scale purchases of Treasury and mortgage-backed securities. These purchases were part of quantitative easing (QE) to stabilize financial markets during the pandemic. QE shifted from a crisis tool to a default policy, with the Fed conducting open-ended asset purchases. The Fed’s balance sheet now exceeds pre-2008 levels by more than 10 times. Policymakers must now consider how to reduce the balance sheet without destabilizing markets. The central question is how to unwind a policy that has become a structural feature of monetary policy.