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The Fed purchased nearly $5 trillion of Treasury securities and mortgage-backed bonds from 2020 to 2022 to stabilize financial markets during the pandemic and keep longer-term interest rates low. The bond-buying lifted its securities holdings to $9 trillion.

When the central bank buys a Treasury note, for example, it pays for it with newly-created money that is deposited into reserve accounts banks hold at the Fed.

In the past three years, however, the Fed has reduced its holdings to about $6.6 trillion. To shrink its holdings, the Fed lets securities mature without replacing them, reducing bank reserves. The risk is if it reduces its holdings too far, short-term interest rates could spike as banks borrow money to top-up their reserves.

In 2019, the Fed was reducing its balance sheet and caused a sharp, unexpected spike in short-term rates that disrupted financial markets, an outcome they want to avoid this time.

The Fed currently is reducing its holdings of mortgage-backed securities by up to $35 billion a month and Treasuries by just $5 billion a month. Powell said two weeks ago that the Fed would consider ending the rolloff "in coming months," but analysts now expect it to happen sooner because of recent signs that banks are running low on reserves.