Honey, I shrunk the Fed. (Not a sci-fi fantasy)
Promoting the discount window may be the Fed’s key to shrinking its $7trn balance sheet, says Bill Nelson
When it comes to its balance sheet, the Federal Reserve seems to be stuck in a feedback loop it could feasibly resolve – without the aid of science fiction.
The Fed is shrinking its securities portfolio by allowing some US Treasuries to mature without replacement – a process known as quantitative tightening (QT). As its assets shrink, so do its liabilities, in particular reserve balances – commercial bank deposits at the Fed. Limits on how far reserve balances can decline will determine when QT
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