Quantitative Tightening: How $2.4 Trillion Left the Fed's Balance Sheet

The Federal Reserve's balance sheet peaked at $8.97 trillion in April 2022. By December 2025 it had fallen to $6.54 trillion.

The phrase for that shrinking is Quantitative Tightening. The Federal Open Market Committee (FOMC), which sets the policy, never uses it in its own documents. The term appears in none of its principles, plans, statements or minutes, which say "balance sheet runoff" or "reducing the size of the balance sheet" instead. This guide follows what the Fed actually did, what the caps allowed and where the money went.

Nothing is sold. When a bond the Fed owns matures, the issuer repays the principal. In normal times the Fed uses that cash to buy another bond, which keeps the balance sheet flat.

Runoff means letting some of that cash go uninvested. The Committee set a monthly cap on how much principal could leave. Anything above the cap was still reinvested.

Two numbers run through this guide. Total assets are everything the Fed owns. Securities held outright are the bonds and mortgage securities inside that total. They are what runoff acts on.

Chart 1 tracks the securities. The pandemic buying is the steep climb. The decline from April 2022 flattens out at the end of 2025, then turns up again. Total assets fell 27.1% over the same stretch.

The Fed put it this way in January 2022. It would reduce its holdings "primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA)".

One detail in the plans decides how this ends. If maturing Treasury notes and bonds fell short of the cap in a month, the Fed would redeem Treasury bills to fill the gap. Mortgage securities had no such filler.

They changed four times in three and a half years.

Source: Federal Reserve, FOMC statements and Implementation Notes; YX Insights

The table gives each step. Treasury caps started at $30 billion a month, doubled to $60 billion after three months, then came down twice as the Committee slowed the pace. The agency cap reached $35 billion in September 2022 and never moved again.

Runoff ran for 42 months, from June 2022 to November 2025. Multiplying each cap by the months it applied gives the most the Fed could have let go: $1,640 billion of Treasuries and $1,417.5 billion of agency debt and mortgage securities.

The Committee ended it on 1 December 2025. The reason for stopping sits on the other side of the balance sheet.

On Treasuries, almost exactly. On mortgages, nowhere near.

Chart 2 sets what actually ran off against what the caps permitted. Treasury holdings fell $1,582.0 billion, which is 96.5% of capacity. Mortgage holdings fell $653.8 billion, which is 46.1%.

The reason is that a cap is a ceiling, not a target. The Fed can only let go of principal that is actually repaid.

Treasuries could always reach the ceiling, because of the bill filler. Any month when maturing notes and bonds fell short, redeeming bills closed the gap. Mortgages had no filler, so runoff there was whatever homeowners happened to repay. Mortgage principal arrives when they move or refinance.

After 2022 very few did either. The Fed's own researchers wrote in 2024 that "effectively all of the mortgages underlying the SOMA agency MBS are 'out-of-the-money' to refinance, which disincentivizes prepayment".

Measured over the 39 months after the cap settled at $35 billion, mortgage runoff averaged $16.8 billion a month.

The Fed's liabilities are what it owes. In total they have to fall by as much as its assets do, though individual lines move both ways.

Two of them carry most of the story. Bank reserves are the money commercial banks hold in their accounts at the Fed. Reverse repurchase agreements are cash that money market funds and others lend to the Fed overnight against bonds.

Chart 3 shows the four largest liability lines over the runoff window, from June 2022 to December 2025. Reverse repurchase agreements fell $1,898.0 billion. Bank reserves fell $479.2 billion.

The other two went the other way. The Treasury's own account at the Fed rose $127.9 billion. Federal Reserve notes in circulation rose $147.1 billion.

So reverse repos took roughly four times the hit that reserves did.

That is why most of the exercise passed without incident. Reserves are the line that money market conditions turn on. They fell from $3,357.4 billion to $2,878.2 billion over three and a half years, while the balance sheet shed more than $2 trillion.

It was reserves that ended it. The Fed's own balance sheet report gives the reason: money markets were "indicating that reserve balances had moved close to ample levels".

The honest answer is that the Fed has not put a number on it.

None of the Fed documents behind this guide puts a number on it. The statements, the Implementation Notes, the minutes, the balance sheet reports and the Monetary Policy Reports all describe what the Committee intended and what the holdings did. None estimates an effect on growth, inflation, mortgage rates or bond yields.

What the Fed has said is narrower and more specific. The Committee calls the policy rate "its primary means of adjusting the stance of monetary policy", with the balance sheet running in the background on a published schedule.

When it slowed the pace in 2024, all participants stressed that the decision "would have no implications for the stance of monetary policy".

What the record does carry is specific enough to be useful. The Fed intended no change in policy stance. Treasuries ran off at almost the full cap and mortgages at under half of it.

Reverse repos absorbed about four times what reserves did. Runoff stopped when reserves neared the level the Committee calls ample.

The effect on output or prices is a separate question, which the documents do not answer.

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The Fed lets bonds it owns mature without buying replacements, so its balance sheet shrinks. It is the reverse of Quantitative Easing, which is the Fed buying bonds to make the balance sheet grow. It is not selling bonds into the market. The FOMC does not use the phrase in its policy documents, preferring "balance sheet runoff".

Runoff began on 1 June 2022 and ended on 1 December 2025, a span of 42 months. Total assets peaked earlier, on 13 April 2022, at $8.97 trillion. They bottomed at $6.54 trillion on 3 December 2025 and have risen since.

Total assets fell $2.43 trillion from the April 2022 peak to the December 2025 low, a fall of 27.1%. Securities held outright fell by rather less, because other asset lines moved too.

Because the cap was a ceiling on what could run off, not a commitment to reach it. Mortgage principal only reaches the Fed when borrowers refinance or move. With most borrowers holding loans cheaper than prevailing rates, repayments ran at about half the $35 billion cap.

DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.