Suppose the Federal Reserve instructs the Trading Desk to sell $850 million of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial banks.

When the Fed sells $850 million of securities, its assets will reduce by $850 million, but its liabilities will also reduce by $850 million as the reserve deposits by commercial banks reduce by the same amount. These changes are illustrated using T-accounts as follows:

For commercial banks, there is no change in liabilities, but the composition of assets changes. Securities will increase by $850 million while reserve deposits reduce by $850 million. These changes are illustrated using T-accounts as follows: