What is the composition of the Fed balance sheet?

The Federal Reserve's balance sheet, which peaked at roughly $8.9 trillion in early 2022 before declining through quantitative tightening, consists primarily of two categories of assets: US Treasury securities and agency mortgage-backed securities (MBS). Treasuries account for roughly two-thirds of total assets, spanning maturities from short-term bills to 30-year bonds. Agency MBS, guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, account for most of the remainder. Smaller holdings include loans through the discount window and emergency facilities, foreign currency reserves, and gold certificates.

The composition evolved significantly across successive rounds of quantitative easing. QE1 in 2008-2010 was heavily weighted toward MBS purchases to support the housing market and stabilize mortgage-backed securities during the financial crisis. QE2 in 2010-2011 focused exclusively on Treasury purchases. QE3 in 2012-2014 combined both, buying $40 billion in MBS and $45 billion in Treasuries per month. The pandemic-era QE4 was the largest, purchasing $80 billion in Treasuries and $40 billion in MBS monthly at its peak.

Composition matters because it determines which market segments the Fed directly affects. Treasury purchases reduce term premium and lower yields across the government bond curve, benefiting all borrowers indirectly. MBS purchases additionally compress the spread between mortgage rates and Treasuries, providing targeted support to the housing market. Critics have questioned whether MBS purchases are appropriate, arguing they distort housing markets and create a subsidy for homeownership over other forms of investment.

During quantitative tightening (QT), the Fed allows maturing securities to roll off without reinvestment. Because MBS prepay unpredictably (depending on refinancing activity), the pace of MBS runoff is harder to control than Treasury runoff. In the current high-rate environment, MBS prepayments have slowed dramatically, meaning the MBS portfolio shrinks more slowly than the Fed might prefer. This has led to discussions about whether the Fed should actively sell MBS to accelerate the transition toward a Treasury-only portfolio, which many officials consider the ideal long-run composition.