A User’s Guide to Reducing the Federal Reserve’s Balance Sheet

Anderson, Alyssa G.; Barbarino, Alessandro; Diercks, Anthony M.; Miran, Stephen I.

doi:10.17016/FEDS.2026.019

Working Paper

A User’s Guide to Reducing the Federal Reserve’s Balance Sheet

Abstract: For the avoidance of doubt: 1) This catalogue 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. 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 will 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.

JEL Classification: E52; E58;

https://doi.org/10.17016/FEDS.2026.019