How Does the Fed Adjust its Securities Holdings and Who is Affected?

Abstract

The Federal Open Market Committee indicated in its September 2017 post-meeting statement that it will initiate in October a balance sheet normalization program to gradually reduce its securities holdings. This action will put in place a policy of reinvesting and redeeming portions of the principal payments received by the Federal Reserve from its holdings of Treasury and agency securities. How are these adjustments to the Federal Reserve?s securities holdings transacted and who is affected? This paper provides a primer regarding how the Federal Reserve accounts for these securities transactions. It also illustrates the numerous ways that the Federal Reserve's actions can play out across other sectors of the economy, including those that engage directly with the Federal Reserve and those that are involved indirectly as funds change hands.

JEL Classification: E52, E58, M41