What the Fed’s Balance Sheet Could Mean for the Debt

TL;DR: The Federal Reserve holds $4.5 trillion in Treasury securities, which Bipartisan Policy Center says keeps downward pressure on long-term interest rates. If the Fed shrinks that portfolio, other buyers have to take the debt, and long-term yields could rise. That would raise the bar any illiquid private deal you're considering has to clear.

Key Takeaways

• The Fed holds about $6.7 trillion in assets as of October 2026, including $4.5 trillion in Treasuries, per Bipartisan Policy Center.
• The Fed has shrunk its balance sheet before, from $8.9 trillion in 2022 to $6.5 trillion in 2025, per the Congressional Research Service.
• Dates to watch: Federal Open Market Committee (FOMC) meetings, the November 4 Treasury Quarterly Refunding announcement, and the findings of the Task Force on Balance Sheet Policy.
• No source here puts a number on how much yields would move if the Fed shrinks further.

The Bipartisan Policy Center published an explainer this week on how the Fed's holdings of long-term Treasury securities connect to the national debt. It names a task force that is looking at possible changes to the size and composition of the portfolio. Nothing in it says the Fed has chosen a new path.

What is on the Fed's balance sheet?

Mostly Treasury debt, paid for by bank reserves and cash in circulation.

Item	Amount	Side of the ledger
Treasury securities	$4.5 trillion	Asset
Mortgage-backed securities	$1.9 trillion	Asset
Bank deposits, mostly reserve balances	$3.0 trillion	Liability
Federal Reserve notes (currency in circulation)	$2.4 trillion	Liability
Treasury General Account	Nearly $900 billion	Liability

The liabilities column is where shrinking gets hard. Stanford's Graduate School of Business puts it plainly: shrinking would not be easy, though recent research outlines tools the Fed could use.

How does the balance sheet connect to the national debt?

Bipartisan Policy Center states that the $4.5 trillion portfolio "continues to put downward pressure on long-term interest rates." Lower long-term rates mean cheaper borrowing for the government.

Run that in reverse and you get a reasonable reading, though not a measured result. If the Fed lets its holdings run down, other buyers must absorb the same supply of Treasuries, and they may ask for higher yields to do it. Nobody in the sources here puts a figure on that effect, and any specific yield forecast would be a guess.

The Fed has already tried a smaller footprint. According to the Congressional Research Service, it cut the balance sheet from $8.9 trillion in 2022 to $6.5 trillion in 2025. During that stretch its net income turned negative, from September 2022 to November 2025, because it paid more on bank reserves and reverse repos than its securities earned.

Why is a smaller balance sheet on the table?

The counterweight is crisis capacity.

What does this mean for you as an accredited investor?

You are probably being shown projected returns on private deals, and the useful comparison is a Treasury paying you with no lockup and no fee stack. If balance sheet policy pushes long-term yields up, that comparison gets harder for illiquid deals to win. A projected return that cleared the bar last quarter may not clear it next quarter. Venture and angel checks aren't priced off the 10-year, but the same pull on your capital applies.

If you hold private credit or real estate funds, ask the sponsor how returns hold up if long-term rates stay higher for longer. Rate policy already moves those allocations, as the Fed's rate hold and private credit spreads shows. And if you want to see how big the exposure is, the private credit market data sizes it.

Common mistakes

A policy discussion isn't a decision, and it's easy to forget that. The task force hasn't published findings, so a rate-sensitive move made today rests on a forecast nobody has sourced. A quieter trap is comparing a deal's projected return to a Treasury yield before subtracting fees and the cost of being locked up. That comparison flatters almost every private deal.

FAQ

Who does the U.S. owe its debt to?

The Fed is one holder, with $4.5 trillion in Treasury securities, per Bipartisan Policy Center. The explainer doesn't break out the rest, so Treasury's own data is the place for a full list.

What will Kevin Warsh do to interest rates?

Nobody has a sourced answer. Rate decisions come from the FOMC as a committee, and the balance sheet is a separate lever, so any forecast would be speculation.

When should investors look for more detail?

The November 4 Treasury Quarterly Refunding announcement is the next dated event Bipartisan Policy Center names. FOMC meetings and the task force's findings are the other two.

If you'd like this kind of read on rates and private deals each week, the free AIN briefing is where we send it.

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