economy and the federal budget both directly and indirectly. Quantitative easing (QE)-large asset purchasing programs conducted by the Federal Reserve-affects the U.S. The net budgetary effects over time of the combined QE and QT policies are uncertain. Its holdings of Treasury securities gradually rise again in the later years of the decade to meet growing demand for currency. In CBO’s projections, the Federal Reserve again conducts quantitative tightening from 2022 to 2025. After the 2007–2009 recession, QE programs were followed by quantitative tightening (QT) policies-that is, reductions in the Federal Reserve’s holdings of Treasury securities and mortgage-backed securities. The QE programs also have led to earlier increases in the federal funds rate-the interest rate that financial institutions charge each other for overnight loans of their monetary reserves-than would have occurred otherwise, in CBO’s assessment. In the Congressional Budget Office’s assessment, the Federal Reserve’s QE programs conducted in response to the 2007–2009 recession and the 2020 recession induced by the coronavirus pandemic initially reduced federal budget deficits. As economic conditions improved and interest rates rose, however, the deficit-reducing effects of that policy would diminish and could even reverse and add to the federal deficit. If economic output was far below potential output (the maximum sustainable output of the economy) and short-term interest rates were set close to zero, the effects of QE would at first reduce federal deficits, generally. It stimulates economic activity, which affects other budgetary categories.It changes net borrowing costs of the Treasury and the Federal Reserve.QE affects the federal budget through two channels: QE provides that additional stimulus by reducing long-term interest rates and increasing liquidity in financial markets. Historically, the Federal Reserve has used QE when it has already lowered interest rates to near zero and additional monetary stimulus is needed. Quantitative easing (QE) refers to the Federal Reserve’s purchases of large quantities of Treasury securities and mortgage-backed securities issued by government-sponsored enterprises and federal agencies to achieve its monetary policy objectives. The Effects of Quantitative Tightening on the Economy and the Budget Does the Federal Reserve Reduce the Government’s Total Liabilities When It Conducts Quantitative Easing? What Makes Up the Federal Reserve’s Balance Sheet? CBO’s Forecast of the 10-Year Treasury Note Rate and the Federal Funds Rate Major Components of Federal Reserve Remittances as a Share of GDP, by Fiscal Year Remittances as a Share of Federal Revenues, by Fiscal Year The Federal Reserve’s Holdings of Treasury Securities by Maturity, as a Share of GDP Share of Outstanding Nominal Treasury Securities Held by the Federal Reserve, by Maturity Date Assets and Liabilities of the Federal Reserve Risks Associated With Quantitative Tightening.The Federal Government’s Borrowing Costs.Risks of Using the Balance Sheet as a Tool of Monetary Policy.Overall Effect of Quantitative Easing on the Federal Budget.Net Borrowing Costs of the Treasury and the Federal Reserve.Quantitative Easing and the Federal Budget.Federal Reserve Remittances and the Federal Budget.CBO’s Projections for the Federal Reserve’s Balance Sheet.Size and Composition of the Federal Reserve’s Balance Sheet.What Are the Risks of Quantitative Easing?.How Does Quantitative Easing Affect the Federal Budget?.How Do Changes to the Federal Reserve’s Balance Sheet Affect Its Remittances to the Treasury?.What Is CBO’s Projection of the Federal Reserve’s Balance Sheet?.Why Does the Federal Reserve Conduct Quantitative Easing?.How Does the Federal Reserve Conduct Quantitative Easing?.
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