Could someone please explain what Fed balance sheet reduction means

Question

I hear the term ‘balance sheet reduction’ a lot in the recent days in regards to the ending of QE. Could some please explain what balance reduction means? Is it the same as balance sheet run off (which I do not know either)?

In: 3

Answer 1

The key point is that the Fed can create and destroy money. When the Fed expands it’s balance sheet it creates money out of thin air. When the Fed shrinks it’s balance sheet it effectively destroys dollars.