Theoretically speaking the Federal Reserve can shrink and expand its balance sheet. In this article we will analyze, how the FED has done it in the past and especially the FED-s ability to shrink the balance sheet and to what extent in terms of percentage. The Fed’s balance sheet includes a variety of assets, including Treasury securities, mortgage-backed securities, and other assets.
When the Fed wants to shrink its balance sheet, it can sell these assets back to the market. This reduces the amount of money in circulation, which can help to prevent inflation.
The Federal Reserve’s balance sheet has gone through several periods of expansion and contraction throughout its history, with varying percentages of shrinkage during those periods. Here are some notable examples: