The Evolving Role of the Fed’s Balance Sheet: Effects and Challenges

Gulati, Chaitri; Smith, Andrew Lee

doi:10.18651/ER/v107n4GulatiSmith

Journal Article

The Evolving Role of the Fed’s Balance Sheet: Effects and Challenges

Abstract: In this article, Chaitri Gulati and A. Lee Smith present evidence that the Federal Reserve’s expanded balance sheet, with a large portfolio of long-duration assets, has provided a significant amount of policy accommodation in recent years, depressing long-term interest rates by about 1.6 percentage points as of early 2022. They also argue that the FOMC’s plan to remove this accommodation through the passive runoff of maturing securities may prove challenging. They project that the downward pressure the balance sheet is currently placing on longer-term interest rates will only gradually reverse.

Keywords: balance sheets; Federal Reserve; Federal Open Market Committee (FOMC); interest rates; monetary policy;

JEL Classification: E52; E43;

https://doi.org/10.18651/ER/v107n4GulatiSmith