Normalization of the Federal Reserve's Balance Sheet Page: 1 of 3
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Normalization of the Federal Reserve's Balance Sheet
September 20, 2017 (IN10727)
* Marc Labonte
Marc Labonte, Specialist in Macroeconomic Policy (mlabonte~crs.locgov, 7-0640)
This Insight answers questions about the Federal Reserve's (Fed's) September 20 announcement that it would begin to
normalize its balance sheet in October by gradually reducing its asset holdings.
How Did the Balance Sheet Get So Large?
During the 2008 financial crisis, the Fed increased its balance sheet. Initially, the increase mainly took the form of
emergency assistance to provide liquidity to financial firms. As that assistance was repaid, balance sheet growth shifted
to large scale purchases of Treasury securities and mortgage-backed securities (MBS), popularly known as "quantitative
easing" (QE). The Fed made the unprecedented decision to pursue QE in an attempt to place downward pressure on
long-term interest rates in order to stimulate economic activity during and following the "Great Recession." The Fed
currently holds $2.5 trillion in Treasury securities and $1.8 trillion in mortgage-related assets (see Figure 1).
Figure 1. Assets on Fed's Balance Sheet
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Labonte, Marc. Normalization of the Federal Reserve's Balance Sheet, report, September 20, 2017; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc1042203/m1/1/: accessed September 19, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.