Can the Federal Reserve make $2.5trn of cash vanish without anyone much noticing? That is the improbable, even audacious, mission it has begun
involves removing reserves as the central bank pares back its holdings. And just asraises them. Researchers estimate that shrinking the Fed’s balance-sheet by about $2.5trn over a few years has roughly the same impact as raising rates by half a percentage point.
A preview of the possible stresses has played out in the past few weeks. Some banks, having recently lost deposits, have turned to the federal-funds market to borrow reserves from other lenders in order to meet regulatory requirements. Daily borrowing in the fed-funds market in January averaged $106bn, the most in data going back to 2016.
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