This is the mechanism by which the Fed “expands its balance sheet.” Commercial Bank Balance Sheet: A commercial bank’s liabilities are comprised of the deposits it holds (i.e. savings / checking accounts opened by you and me as well as corporations, etc.). read more
The balance sheet of the Fed automatically expands when the Fed buys assets. Likewise, the Fed's balance sheet automatically contracts when it sells them. However, contraction of a balance sheet differs from expansion in the sense that there is a limit beyond which the Fed can't contract its balance sheet. read more
More generally, the Fed needs to tie its balance sheet policies to the state of the economy. It should explicitly commit to reducing its balance sheet a certain dollar amount each month as long as the economy continues to improve. These plans should be communicated clearly and regularly to the public. read more