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

Credit: Risk.net montage

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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