The Fed’s Balance Sheet Runoff: The Role of Levered NBFIs and Households

Cipriani, Marco; Clouse, James A.; Logan, Lorie; Martin, Antoine; Riordan, Will

Discussion Paper

The Fed’s Balance Sheet Runoff: The Role of Levered NBFIs and Households

Abstract: In a Liberty Street Economics post that appeared yesterday, we described the mechanics of the Federal Reserve’s balance sheet “runoff” when newly issued Treasury securities are purchased by banks and money market funds (MMFs). The same mechanics would largely hold true when mortgage-backed securities (MBS) are purchased by banks. In this post, we show what happens when newly issued Treasury securities are purchased by levered nonbank financial institutions (NBFIs)—such as hedge funds or nonbank dealers—and by households.

Keywords: balance sheet runoff; Federal Reserve; money market funds (MMFs); nonbank financial institutions (NBFIs); treasuries;

JEL Classification: E5; G51;