December 2019 issue contents
Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

Michele Cavallo,a Marco Del Negro,b W. Scott Frame,c Jamie Grasing,a Benjamin A. Malin,d and Carlo Rosae


The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the amount when the Federal Reserve's balance sheet normalization program started) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to less than 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.

JEL Code: E58, E59, E69.

Full article (PDF, 52 pages, 862 kb)


a Federal Reserve Board
b Federal Reserve Bank of New York
c Federal Reserve Bank of Dallas
d Federal Reserve Bank of Minneapolis
e Barclays