Fiscal implications of the federal reserve’s balance sheet normalization

Abstract

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.