Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization

Michele Cavallo

Marco Del Negro

W. Scott Frame

Jamie Grasing

Benjamin A. Malin, Senior Economist

Carlo Rosa

January 2018 | Federal Reserve Bank of Minneapolis Working Paper 747

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 current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 percent to under 5 percent. Further reducing longer-run reserve balances from $1 trillion to pre-crisis levels has little effect on the likelihood of net losses.

Related: Liberty Street Economics article, January 9, 2018