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The Federal Reserve shrinks its balance sheet mainly through non-reinvestment: when Treasury or agency securities in its portfolio return principal, the Fed lets some of those payments mature instead of buying replacement securities. Monthly redemption caps determine how much runs off. That process, known as quantitative tightening (QT), ended on December 1, 2025. The Fed now rolls over Treasury principal, reinvests agency-security principal in Treasury bills, and can buy short-term Treasury bills to keep reserves ample.
What quantitative tightening actually does
The Federal Reserve owns a large portfolio of Treasury securities, agency debt and agency mortgage-backed securities (MBS) in its System Open Market Account (SOMA). Those securities are assets on the Fed’s balance sheet. Each security has scheduled principal payments, including repayment at maturity.
During QT, the Fed does not replace all of that returned principal with new securities. The portion it allows to mature without reinvestment disappears from the securities portfolio. With fewer securities on the asset side, the balance sheet becomes smaller, assuming other balance-sheet items do not offset the change.
This is different from a routine sale program. The 2022 plan emphasized predictable runoff through maturity and limited reinvestment rather than relying on large outright sales. The Federal Open Market Committee (FOMC) set monthly caps so the pace could be controlled and adjusted.
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How runoff works, step by step
- Principal comes back. A Treasury or agency security held in SOMA makes a principal payment or reaches maturity.
- The payment is compared with the monthly cap. The FOMC’s cap applies to the amount of principal allowed to run off in that month for each asset category.
- Principal up to the cap is not replaced. That amount leaves the securities portfolio as the security matures or pays down.
- Any amount above the cap is reinvested. When scheduled principal exceeds the cap, the Desk reinvests the excess, preserving a predictable maximum monthly decline.
- The asset mix changes over time. As securities mature and are not replaced, total securities holdings and, all else equal, total assets decline.
The caps control the pace; they do not guarantee that the same dollar amount runs off every month. Maturity schedules and mortgage prepayments determine how much principal is available. If available principal is below a cap, the actual runoff is smaller.
What caps did the 2022 plan use?
The FOMC’s initial 2022 plan started with lower caps and then increased them after three months. The eventual monthly limits were $60 billion for Treasury securities and $35 billion for agency debt and agency MBS. These figures describe the historical starting framework, not a current policy setting.
The FOMC later adjusted the pace as conditions changed and ultimately ended aggregate securities runoff effective December 1, 2025. Therefore, quoting the 2022 caps as if they still govern the Fed’s portfolio would be incorrect.
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The original policy document is “Plans for Reducing the Size of the Federal Reserve’s Balance Sheet,” published May 4, 2022.
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Why a smaller securities portfolio does not equal an identical fall in reserves
Reserve balances are liabilities of the Federal Reserve, not assets. They are the deposits that eligible financial institutions hold at Federal Reserve Banks. The Fed’s liabilities also include Federal Reserve notes (currency), the U.S. Treasury’s General Account (TGA), and balances in the overnight reverse repurchase (ON RRP) facility.
When securities run off, the payment has to be reflected somewhere on the liability side. The result for reserves depends on what happens to those other liabilities. For example, a decline in ON RRP balances can absorb some of the balance-sheet adjustment that might otherwise appear as lower reserves. Conversely, growth in another liability can reduce reserves even after securities runoff has stopped.
That is why “every dollar of QT removes one dollar of bank reserves” is an unsafe shortcut. Runoff reduces securities holdings directly; the effect on reserves depends on the payment flows and changes in the Fed’s other liabilities. The Federal Reserve explains this balance-sheet interaction in its 2026 paper, “A User’s Guide to Reducing the Federal Reserve’s Balance Sheet.”
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The FOMC uses two related but distinct tools. It changes the federal funds rate target range to adjust the stance of monetary policy, while it manages securities holdings to operate an ample-reserves system. The FOMC stated that “The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.”
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That statement appears in the May 4, 2022 balance-sheet plan. QT can occur while the target range is unchanged, and a rate decision can occur without starting or stopping runoff. Treating QT as a replacement for rate policy confuses the tools’ purposes.
When the Fed stopped shrinking its portfolio
October 2025 decision
In October 2025, the FOMC announced that aggregate securities runoff would conclude beginning December 1, 2025. The instructions changed what happened to principal payments:
- Principal from Treasury holdings would be rolled over at Treasury auctions.
- Principal from agency securities would be reinvested in Treasury bills.
Rolling over or reinvesting principal prevents the scheduled payments from reducing the relevant portion of the securities portfolio through ordinary runoff. The Fed’s Policy Normalization page records the official sequence of decisions.
December 2025 onward
In December 2025, the FOMC also authorized purchases of shorter-term Treasury securities as needed to maintain ample reserves. These purchases belong to a reserve-management phase, not to QT. Their purpose is to supply reserves and keep the operating framework functioning, rather than to shrink the securities portfolio.
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What the post-QT numbers show
Several official releases report different measures. Total assets, securities held outright and reserve balances should never be treated as interchangeable.
| Measure | Observation | Figure | What it represents |
|---|---|---|---|
| Securities holdings decline | June 1, 2022 to October 31, 2025 | About $2.2 trillion | Cumulative decline in the Fed’s securities holdings during the QT period |
| Total assets | July 1, 2026 | About $6.7 trillion | All Federal Reserve assets, not just securities |
| Reserve balances | July 1, 2026 | About $3.1 trillion | A Federal Reserve liability held by financial institutions |
| Reserve balances, weekly average | Week ending September 30, 2026 | $2,948,090 million (about $2.948 trillion) | Average reserve balances for that week |
| Securities held outright | September 30, 2026 | $6,464,597 million (about $6.465 trillion) | Asset holdings owned outright by the Federal Reserve |
The last two figures come from the October 8, 2026 H.4.1 release. The reserve figure is a weekly average, while securities held outright are measured on September 30. Comparing them as if they were the same type of observation produces a misleading ratio.
How reserve-management purchases work after QT
The Federal Reserve’s July 2026 Monetary Policy Report said that, since early January 2026, SOMA had purchased nearly $250 billion in Treasury bills. Approximately $160 billion represented reserve-management purchases, and about $90 billion represented reinvestment of agency-MBS principal.
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Purchasing bills after runoff ends does not reverse the earlier QT mechanically. It reflects a new operating need: keeping reserve balances ample as other liabilities and payment flows change. Whether total assets rise or fall at any particular time depends on all balance-sheet components, not just the securities transaction visible in a single announcement.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.A timeline of the Fed’s balance-sheet phases
| Period | Mechanism | Policy purpose | Balance-sheet interpretation |
|---|---|---|---|
| June 2022–October 31, 2025 | Allow principal to mature or pay down up to monthly caps; reinvest excess | Reduce securities holdings in a predictable way | QT runoff; securities holdings declined about $2.2 trillion over the cited interval |
| Beginning December 1, 2025 | Roll over Treasury principal; reinvest agency principal in Treasury bills | End aggregate securities runoff | Runoff stopped; principal was replaced rather than allowed to reduce holdings under the prior plan |
| Early January 2026 onward | Purchase Treasury bills for reserve management, alongside agency-principal reinvestment | Maintain ample reserves | Post-QT reserve-management purchases; not a continuation of runoff |
How to read a balance-sheet release without mixing up the measures
Start with the date and frequency
Weekly H.4.1 data can report an average over a week for some liabilities and a point-in-time amount for assets. A monthly or annual report may cover a different observation date. Put the date next to every number before drawing a comparison.
Identify whether the number is an asset or liability
Securities held outright and total assets are on the asset side. Reserve balances, currency and the TGA are liabilities. A change in one category can be offset by a change in another, so the balance sheet cannot be interpreted from a single line item.
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A purchase amount describes a flow over a period, while a securities-holdings figure describes a stock at a particular date. The nearly $250 billion of bill purchases reported for early 2026 is a cumulative transaction total; the $6.465 trillion securities-held-outright figure is a point-in-time stock.
Common misconceptions and the accurate version
- “The Fed sells everything during QT.” The main 2022 mechanism was allowing principal payments to mature without full reinvestment, not disposing of the entire portfolio through routine sales.
- “The old $60 billion and $35 billion caps are current.” They were historical 2022 parameters. Runoff ended December 1, 2025.
- “QT always cuts reserves one-for-one.” Other liabilities, including ON RRP balances, currency and the TGA, affect how securities runoff translates into reserves.
- “The Fed is still shrinking its balance sheet in 2026.” The cited official information says aggregate runoff ended, while reserve-management Treasury-bill purchases began.
- “The Fed has published one fixed ample-reserves threshold.” The FOMC describes ample reserves as a judgment based on operating conditions; the cited materials do not establish a single permanent numerical cutoff.
- “A rate hike and QT are the same decision.” The federal funds rate is the primary instrument for changing the policy stance; securities management supports the ample-reserves framework.
Why the distinction matters for readers
Someone tracking the Fed’s policy stance needs to ask three separate questions: Is the FOMC changing the federal funds rate target? Is the securities portfolio running off or being replenished? And are reserve balances changing because of securities transactions or because other liabilities are moving?
Those questions prevent a common analytical error: treating a headline about total assets as proof that reserves moved by the same amount, or treating a Treasury-bill purchase as evidence that QT restarted. The official data show a transition from a capped, non-reinvestment runoff program to a reserve-management regime after December 2025.
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