QE vs QT: How the Fed Balance Sheet Actually Works

TL;DR. Quantitative easing (QE) is when the Federal Reserve buys
Treasuries and mortgage-backed securities (MBS) from banks, paying with newly created
reserves — that swells the Fed’s balance sheet. Quantitative tightening (QT)
is the reverse: the Fed stops reinvesting principal as those bonds mature, letting
the balance sheet shrink. The Fed concluded its most recent QT program on
December 1, 2025, after roughly three and a half
years of runoff that reduced securities holdings by more than $2.2 trillion.

This article walks through what is actually on the Fed’s balance sheet, the
mechanics of QE and QT step-by-step, the 2022–2025 cycle, what people
commonly get wrong, and where to track it yourself.

What is on the Fed’s balance sheet?

The Federal Reserve publishes its balance sheet every Thursday in the
H.4.1 release. Like any balance sheet, it has assets on one
side and liabilities (plus capital) on the other.

Assets (what the Fed owns)

• U.S. Treasury securities held outright — bills, notes, and
  bonds bought through open-market operations. These are the workhorse of QE.
• Agency mortgage-backed securities (MBS) — pools of home
  loans guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.
• Loans, repo, and emergency facilities — usually tiny in
  normal times, but they spike during crises.

Liabilities (what the Fed owes)

• Federal Reserve notes — the cash bills in your wallet.
• Reserve balances of depository institutions — deposits banks
  hold at the Fed. This is the line that QE inflates the most.
• Reverse repo (ON RRP), Treasury General Account (TGA) —
  other ways the Fed’s liabilities are distributed across counterparties.

The whole thing balances by accounting identity: every bond the Fed buys is paid
for by crediting a bank’s reserve account at the Fed. The Fed does not need to
“have” the money first; it creates the reserves on its own ledger when it
buys.

The Fed’s balance sheet today

Line item	May 13, 2026 ($ millions)	Approx. $ trillions
U.S. Treasury securities held outright	4,450,235	$4.45T
Agency mortgage-backed securities	1,981,060	$1.98T
Reserve Bank credit (assets ex. gold & SDR)	6,673,028	$6.67T
Total assets	6,728,502	$6.73T

How QE actually works (the worked example)

Forget the phrase “printing money.” QE is more boring than that —
and more precise. Step by step:

1. The FOMC tells the New York Fed’s open-market desk to buy,
   say, $10 billion of 10-year Treasuries.
2. The desk conducts an auction with primary dealers (large banks like JPMorgan,
   Goldman, etc.). They sell the Treasuries to the Fed.
3. The Fed pays by crediting the dealers’ reserve accounts at the Fed.
   No paper money changes hands. New reserves are created with a keystroke.
4. The Fed’s balance sheet expands by $10B on both sides: +$10B in
   Treasury holdings (asset) and +$10B in bank reserves
   (liability).

So QE swaps a long-duration government bond on a bank’s books for
short-duration reserves at the Fed. Two effects follow:

• Long-term yields fall because the Fed is a price-insensitive
  buyer that mops up duration.
• Bank reserves rise. Whether that translates into broader money
  supply growth depends on whether banks actually lend it out — which is why QE
  is “not the same as printing” in the textbook M2 sense.

Analogy: imagine the Fed is the world’s biggest used-bond dealer. When
it shows up at the auction and buys aggressively, prices go up and yields go down.
That is QE.

QE and QT, in one diagram

QE: Fed buys bonds

Bank holds Treasuries

Federal Reserve

bond new reserves

Fed balance sheet: + assets and + liabilities Long-term yields tend to fall.

QT: bonds mature, not reinvested

Federal Reserve

U.S. Treasury redeems bond

principal

Fed simply does not reinvest the principal. – assets and – liabilities Long-term yields face upward pressure.

How QT works (it is mostly “do nothing”)

QT is not the Fed actively selling bonds into the market. Almost always, it is
passive runoff: when bonds the Fed already holds mature, the Fed
chooses not to reinvest the principal. Those reserves disappear from the Fed’s
liabilities, and the asset side shrinks by the same amount.

To control the pace, the Fed sets monthly redemption caps. If more
principal matures than the cap, the excess is reinvested; if less matures, no
reinvestment happens. That is why QT moves in a predictable, smooth line, not in
lumps.

For the 2022–2025 cycle, the caps evolved as follows:

Date	Action	Treasury cap / mo	MBS cap / mo
June 1, 2022	QT begins (phase-in)	$30B	$17.5B
September 2022	Caps step up to full pace	$60B	$35B
June 2024	Treasury cap reduced (slower QT)	$25B	$35B
December 1, 2025	QT concludes; full reinvestment resumes	—	—

Bottom line: the Fed told markets exactly how fast it would shrink, and stuck to it
for ~3.5 years. Compared with raising the federal funds rate, QT is a slow tide, not
a wave.

The 2022–2025 QT cycle, by the numbers

Fed QT monthly redemption caps (US$ billions)

0 25 50 75 100

Jun-Aug 2022 phase-in $47.5B Sep 2022 – May 2024 $95B Jun 2024 – Nov 2025 $60B Dec 2025 – QT ended $0

Treasuries Agency MBS

The 2022–2025 cycle — what actually happened

Between the pandemic response and 2022, the Fed’s balance sheet roughly
doubled as the Fed bought heroic quantities of Treasuries and MBS. By the time QT
started, the Fed was the world’s largest holder of U.S. Treasuries.

Then runoff began. According to the
Fed’s policy normalization page,
“Since June 2022, the Fed’s securities holdings have declined by more than
$2.2 trillion, comprising approximately $1.6 trillion in Treasury
redemptions and $600 billion in agency MBS reductions. Securities holdings as
a share of GDP decreased 13 percentage points, from 33% to 20%.”

Three things made this cycle different from the post-GFC unwind:

• It happened alongside aggressive rate hikes. So QT was the
  background and the federal funds rate was the foreground — markets mostly
  reacted to the latter.
• It was telegraphed in advance. Fixed caps meant traders could
  model the runoff to the dollar each month.
• It ended early, by Fed standards. Stress in repo markets and
  reserve scarcity concerns in 2025 pushed the FOMC to halt runoff before reserves
  fell to clearly “ample” levels.

Common mistakes people make about QE and QT

1. “QE prints money that goes into the stock market.”
   Not directly. QE creates bank reserves at the Fed; those reserves cannot be spent on
   Robinhood. They influence asset prices via lower long-term yields and a
   “portfolio rebalance” channel, not by being handed to investors.
2. “QT is the Fed selling bonds.” Almost never. The Fed
   sets caps and lets bonds mature. Outright sales would be a much more aggressive
   step and would need to be announced explicitly.
3. “The balance sheet has to go back to its pre-2008 size.”
   No. Demand for reserves and currency has grown with the economy, and the Fed has
   said it wants to operate in an “ample reserves” regime. Most observers
   expect the post-QT balance sheet to stabilize well above pre-2008 levels.
4. “QE caused all the inflation.” Inflation outcomes
   depend on fiscal policy, supply shocks, expectations, and the labor market, not just
   the size of the Fed’s balance sheet. The 2008–2014 QE era did not produce
   high inflation; the 2020–2022 episode did, but alongside very large fiscal
   transfers and a supply-side shock.

Related concepts

• Bond duration and convexity — why QT
  affects 10-year and 30-year yields more than 2-year yields.
• The yield curve — QE flattens it; QT
  steepens it, all else equal.
• Repo and reverse repo — the short-end
  plumbing that becomes important as reserves shrink under QT.

Sources

• Federal Reserve, H.4.1 release — weekly balance sheet.
• Federal Reserve, Policy Normalization —
  $2.2T runoff, 33% to 20% of GDP.
• FOMC press release, May 4, 2022 — original
  QT caps.
• FOMC press release, May 1, 2024 — slower
  Treasury runoff.
• FOMC press release, October 29, 2025 —
  QT concludes December 1, 2025.
• Federal Reserve, Credit and Liquidity Programs and the Balance
  Sheet — reference on balance-sheet mechanics.

Disclosure: This article was produced with AI assistance and reviewed before
publication. It is for informational purposes only and is not investment advice.