Fed's Schmid: Never returning to Fed balance sheet size seen before financial crisis

Fed's Schmid: Never returning to Fed balance sheet size seen before financial crisis

Fed’s Schmid: Balance Sheet to Remain Significantly Larger Than Pre-Crisis Levels
Federal Reserve officials have confirmed that the central bank’s balance sheet will not return to its pre-2008 financial crisis size, emphasizing the need to maintain ample liquidity in the financial system. Kansas City Fed President Jeff Schmid highlighted this stance during remarks at the Economic Forum of Albuquerque, stating that structural changes in the economy and evolving monetary policy frameworks necessitate a larger balance sheet according to his remarks.

The Fed’s balance sheet peaked at $8.9 trillion during the pandemic but has since been reduced to $6.5 trillion as of December 2025 through quantitative tightening (QT) as reported. However, Schmid noted that the central bank has resumed balance sheet growth in recent months to address liquidity needs, particularly as demand for bank reserves and U.S. currency has risen with economic expansion. “The minimum size of the balance sheet is determined by demand for the Fed’s liabilities,” he explained, citing organic growth in currency usage and higher-than-expected reserve requirements driven by regulatory and technological shifts according to his remarks.

Schmid also emphasized the Fed’s ongoing efforts to reduce its footprint in financial markets. Since 2022, the FOMC has cut its mortgage-backed securities (MBS) holdings by $700 billion, from $2.7 trillion to $2 trillion, aiming to minimize its influence on mortgage markets according to his remarks. Additionally, the Fed is shortening the average maturity of its Treasury portfolio to align with normal market conditions and reduce distortions in the yield curve.

The central bank’s balance sheet now consists of $4.2 trillion in Treasury securities and $2.1 trillion in MBS, with liabilities including $2.4 trillion in currency and $2.9 trillion in bank reserves as documented. Schmid acknowledged that while reducing reserve demand over time is feasible—through regulatory adjustments or technological advancements—the Fed’s balance sheet will remain “somewhat above the level … consistent with ample reserves” in the long term according to his remarks.

This approach underscores the Fed’s commitment to maintaining monetary policy independence while adapting to a post-pandemic economy. As Schmid concluded, “The Fed’s balance sheet is a critical tool for ensuring financial stability, and its size reflects the evolving needs of the economy.” according to his remarks