This policy is also reducing reserve balances. So far, after the first seven months of the program, the Fed has shed about $ billion of its securities holdings, which is a fairly modest amount when compared with the remaining size of its balance sheet. Consequently, the level of reserves in the banking system is still quite abundant.
So, how many more reserve balances can be drained, and how small will the Fed’s balance sheet get? Let me emphasize that this question is highly speculative—policymakers have not decided the desired long-run size of the Fed’s balance sheet, nor, as I noted earlier, do we have a definitive handle on banks’ long-run demand for reserve balances.