Fed Reduces Balance Sheet by $2 Trillion in Ongoing Quantitative Tightening Efforts
Quantitative tightening (QT) is a monetary policy tool used by central banks to reduce the money supply in the economy. It's the opposite of quantitative easing (QE), which expands the balance sheet to stimulate the economy.
The Federal Reserve has conducted two major QT programs: one from 2017 to 2019 and another starting in June 2022. The main goal of QT is to normalize interest rates by reducing the supply of money and raising the cost of accessing credit.
During the first QT program, the Fed used a 'cap' structure to ensure a gradual decline in the balance sheet size. The runoff caps started at $6 billion per month for Treasuries and $4 billion per month for agency debt and MBS, rising each quarter until reaching $30 billion and $20 billion per month, respectively.
After reducing the Treasury runoff cap from $30 billion to $15 billion per month in March 2019, the FOMC ended the balance sheet runoff in July 2019. The second QT program began in June 2022, facing historically high inflation driven by pandemic-era fiscal and monetary stimulus.
By late 2024, the Fed had reduced the balance sheet by more than $2 trillion from its peak of nearly $9 trillion, roughly 35% of US GDP. According to data through March 2025, the overall Federal Reserve balance sheet dropped by $2.19 trillion since the start of the most recent QT round in June 2022.