From CentralBanking.com:
Federal Reserve economists project possible routes towards returning the balance sheet to a 'normal' size, finding that the process should only have a temporary impact on the Fed's income
Researchers at the Federal Reserve have released projections that suggest the balance sheet could return to normal size by 2018–19, without having a drastic effect on the Fed's income.
According to the Fed's latest balance sheet figures, published on January 17, total securities holdings stand at nearly $2.7 trillion. The figure is growing at a rate of $85 billion a month as a result of the Fed's quantitative easing programme, which is set to continue until unemployment falls below 6.5%.
In the paper*, published as part of the Fed's Finance and Economics Discussion Series, the authors base their projection on estimates of the federal funds rate derived from a survey of professional forecasters, which predicts the rate will start to rise in the first quarter of 2015 until it reaches 3.8% in 2019. They also produce three baseline asset purchase scenarios, whereby the Federal Open Market Committee (FOMC) votes for no further quantitative easing, for $500 billion easing in 2013 and for $1 trillion of easing in 2013.
They then combine these assumptions with the "exit strategy" put forward by the FOMC in June 2011. According to the current plan, when the Fed decides to cut back its balance sheet some securities will be allowed to mature, the federal funds rate will be increased, and a gradual process of sales will begin. The securities portfolio will then normalise over a period of two to three years.
The results suggest that, under the scenario of $1 trillion in further purchases, the Federal Reserve will begin to shrink the balance sheet in 2015, returning it to a "normal" size in 2019 – using the $25 billion minimum level for reserve balances as ‘normal'. However, the authors stress that the projections are not forecasts, and "depend critically on a whole host of assumptions"....MORE
