During the last two Fed cycles, the size of the balance sheet became an important, free variable for the Fed to conduct monetary policy:
- in ~2009, we went from a scarce reserve system to an abundant reserve system, where the Fed had two levers to push: the interest of reserves and the size of the balance sheet. Ordinarily, these were connected, where a larger balance sheet would push down the Fed Funds rate, meaning that there was previously only "one" lever. But using IOER to guide baseline interest rates instead allow the Fed to expand the balance sheet by trillions without losing control of interest rates.
In last year's QT cycle, the question has been a limbo one: How low can you go?
Fed officials still have PTSD from September 2019 when the Repo spike/tantrum signaled that they had shrunk the balance sheet too much: there weren't enough Treasurys around for the commercial banks to do ordinary settlement anymore.
Does it actually matter to anyone but extreme monetary dorks?
Nah, not really. But it's interesting to see one of the most obvious areas in which legacy/fiat MonPol can blow up:
Chilling with the shrinking of the balance sheet also allows the Treasury some extra leeway if/when the new political rulers show up with ideas about cutting government spending and re-instating a debt limit.
There's currently about $800bn in the TGA, meaning the Treasury could go some 3-5 months without influx of new debt.
Keeping the balance sheet large(r) gives more breathing room for the banks and the Treasury both.
I wonder what the Fed will do??