Through the program, the Fed was selling short-term bonds and using the proceeds to buy back $45 billion in long-term bonds each month. The idea was to bring down longer-term yields — currently 1.63 percent on the 10-year and 2.82 percent on the 30-year — and push up short-term yields — currently 0.25 percent on the 2-year and 0.63 percent on the 5-year.
But as assets near $3 trillion and with Operation Twist set to expire at the end of the year, the Fed is not ready to sit on its hands. Many expect the Fed to expand its bond-buying program at the meeting next week, growing its balance sheet and deeply complicating its position.
The Fed’s previously established bug-out plan, in which it would try to reduce its holdings to pre-crisis levels by selling bonds beginning on mid-2015, would have to be dramatically restructured if this is the case. The bigger the balance sheet, the riskier it becomes to unwind.
Before the crisis, the balance sheet averaged about 6.3 percent of nominal GDP, according to Bloomberg. Today, that would mean a balance sheet of under $1 trillion, instead of the current $2.86 trillion. Oliner, from the American Enterprise Institute, estimates that the Fed’s balance sheet could expand over $4 trillion before it is done with a new bond-buyback program.