Mechanically, the Fed will reduce its securities holdings by not reinvesting the funds it receives from maturing securities. So, for example, when a Treasury security hits its maturity date, the Fed will not reinvest the proceeds into another Treasury security (as it has been doing over the past two years). Instead, it will redeem the maturing security, which will reduce the amount of the Fed’s securities holdings and the size of its balance sheet.
The FOMC announced it will begin reducing the size of the Fed’s balance sheet in June 2022. How will such reduction work, and how long will it continue?