The financial media have reported that...

In general, Fed officials appear to have converged to a minimum balance sheet of roughly $3.5 trillion, which means the runoff would end in the second half of the year Link

and it was also reported to come specifically from Chair Powell...

the chairman has said that the reduction in its bond holdings will end soon, with a balance sheet probably no lower than around $3.5 trillion Link

The level of 3.5 T USD will be arrived at, at the rate of 50 B USD per month as described here at this link.

How was the target level of 3.5 T USD determined?


  • $\begingroup$ If you are looking for a specific formula, I think you will be disappointed. I suspect we’ll only really know after whatever the delay is before Fed minutes and/or briefing materials become public. Decisions like this tend to be qualitative with quantitative inputs. $\endgroup$ – dismalscience Mar 20 '19 at 2:33
  • $\begingroup$ @dismalscience Nobody would ever say they are equally content with 3T and 3.5T and 4T. If they said 3.5T there is a reason. $\endgroup$ – H2ONaCl Mar 20 '19 at 2:56
  • $\begingroup$ Again, I think you would be surprised at the degree to which figures like that are the result of an amalgamation of partial models. They’re presumably trying to, while keeping broad short rates within a certain range, move toward a corridor system, while t-bill supply (which competes with deposits) increases and nettable interbank repo market volume increases and custodial bank balance sheet is less encumbered than in the past due to a recent law. I don’t know of a model that anyone would trust that could take those inputs and spit out a precise numeric result. $\endgroup$ – dismalscience Mar 20 '19 at 3:05
  • $\begingroup$ @dismalscience Since nobody expects precision, what you wrote is not an excuse for failing to calculate an approximate result. $\endgroup$ – H2ONaCl Mar 20 '19 at 3:13
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    $\begingroup$ As I also said before, you’ll get to see the reasoning in about five years, when the transcripts and teal books become public. $\endgroup$ – dismalscience Mar 20 '19 at 3:19

My answer will rely largely on the Feb 2019 Monetary Policy Report (summary, full report PDF). From p. 41:

The size of the Federal Reserve’s balance sheet increased from \$900 billion at the end of 2006 to about \$4.5 trillion at the end of 2014

Important note: Your second quote, which seems to be from The Associated Press, claims that Powell "has said that" the Fed will have "a balance sheet probably no lower than around \$3.5 trillion".

However, I am unable to find anywhere else any such quote or statement by a Fed member that explicitly states this \$3.5 trillion figure.

This though is the estimate that has been floating around for at least some months now — e.g. in Jan 2019, UBS economist Seth Carpenter predicted this particular figure for mid-2020. So, it is possible that the AP writer simply accidentally slipped it in.

What Powell/the Fed do say is this (p. 43):

the longer-run size of the Federal Reserve’s balance sheet will be considerably larger than before the crisis.

The reasons are:

(1) projected trend growth for currency in circulation, (2) the Committee’s decision to continue operating with ample reserves, and the higher levels for (3) the TGA, (4) the foreign repo pool, and (5) DFMU balances (I added the numbering).

(1) Currency

This tends to rise in line with nominal GDP and has risen from around \$800B at end 2006 to around \$1.7T now (data).

(2) "Floor system" or "abundant reserves system"

Pre-crisis, bank reserves held at the Fed were negligible (data). In 2014, they peaked at around \$2.8T and have now fallen to around \$1.7T.

At its January 2019 meeting, the Federal Open Market Committee decided that it would continue to implement monetary policy in a regime with an ample supply of reserves, which is often called a “floor system” or an "abundant reserves system." Going forward, the banking system’s overall demand for reserve balances and the Committee’s judgment about the quantity that is appropriate for the efficient and effective implementation of monetary policy will determine the longer-run level of reserve balances. Although the level of reserve balances that banks will eventually demand is not yet known with certainty, it is likely to be appreciably higher than before the crisis (p. 42).

(3) Treasury General Account (TGA)

Before 2008, the Treasury targeted a steady, low balance of $5 billion in the TGA on most days ... In May 2015, the Treasury announced its intention to hold in the TGA a level of cash generally sufficient to cover one week of outflows, subject to a minimum balance objective of roughly \$150 billion. Since this policy change, the TGA balance has generally been well above this minimum; at the end of 2018, it was about \$370 billion, or nearly 2 percent of GDP. The current policy helps protect against the risk that extreme weather or other technical or operational events might cause an interruption in access to debt markets and leave the Treasury unable to fund U.S. government operations (p. 42)

(4) Foreign repo pool

The foreign repo pool has grown from an average level of around \$30 billion before the crisis to a current average of about \$250 billion (p. 43)

(5) "Other deposits"

“other deposits” with the Federal Reserve Banks have also risen steadily over recent years, from less than \$1 billion before the crisis to about \$80 billion at the end of 2018. Although “other deposits” include balances held by international and multilateral organizations, government-sponsored enterprises, and other miscellaneous items, the increase has largely been driven by the establishments of accounts for DFMUs. DFMUs provide the infrastructure for transferring, clearing, and settling payments, securities, and other transactions among financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act provides that DFMUs—those financial market utilities designated as systemically important by the Financial Stability Oversight Council—can maintain accounts at the Federal Reserve and earn interest on balances maintained in those accounts.

Again, I am unable to find \$3.5T explicitly stated anywhere by the Fed/Powell. But at the current balance sheet of about \$4T, current pace of unwinding of about \$30–50B per month, and expected cessation of unwinding some time in mid-2020, \$3.5T is a nice round number that seems plausible and easy to quote.

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  • $\begingroup$ This 3.5T number is no accident: multiple print journalists use it and multiple talking heads on CNBC use it. It is not an accident from a single writer. $\endgroup$ – H2ONaCl Mar 20 '19 at 2:47
  • $\begingroup$ @H2ONaCl: Yup, I noticed that it's been making the rounds in the media. And as I have speculated, it may just be a nice round number that the media has fixated on. If you are able to find any explicit quote or statement by the Fed/Powell, I'd be happy to know about it and change my answer accordingly. $\endgroup$ – Kenny LJ Mar 20 '19 at 2:48
  • $\begingroup$ From your link are estimates from Seth Carpenter... $\endgroup$ – H2ONaCl Mar 23 '19 at 22:28
  • $\begingroup$ Seth Carpenter, chief U.S. economist at UBS and a former deputy director of monetary affairs at the Fed, estimates that the central bank will stop shrinking when reserves stand at about 1 trillion, which is a lower estimate than many of his fellow bankers. “They’re going to be done somewhere in the middle of 2020, … with total assets of about 3.5 trillion,” he predicted. $\endgroup$ – H2ONaCl Mar 23 '19 at 22:28
  • $\begingroup$ The private sector wouldn't have to estimate this if the Fed had provided these numbers so it is confusing why some articles attribute the numbers to the Fed. $\endgroup$ – H2ONaCl Mar 23 '19 at 22:31

There exist some projections resulting from the Federal Reserve surveying the market. In this linked report from the Federal Reserve titled "Projections for the SOMA Portfolio and Net Income" from July 2017 we see the Fed asked market participants what the balance sheet would look like in 2025. With a starting point of 4.5T and the rate of negative 50 B per month it does not take until 2025 to realize some of these numbers for total assets.

Projections for the balance sheet

That report says...

The size of the Federal Reserve’s normalized balance sheet is likely to be driven by the future supply of and demand for a variety of Federal Reserve liabilities.

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