During the financial crisis, the Federal Reserve built up a store of roughly $4.5 trillion in Treasuries and other assets, like mortgage-backed securities, on its balance sheet. Since then, when these assets have come due, the Fed has turned around and reinvested the principal back into new assets, maintaining the size of its balance sheet. Now, nearly a decade after the start of the financial crisis, the Fed has announced its plan for shrinking the size of its balance sheet. The basic idea is that the Fed will stop reinvesting the principal of securities when they mature. Put another way, when a 10-year Treasury on the Fed's books comes due, the money it gets back from that investment will not be used to go out and buy another Treasury. The slowing of reinvestment will be phased in over time. To start, the Fed will invest money back into the market only if it gets back more than $6 billion in principal returned a month. From there, the "cap" will increase by $6 billion every three months over the course of a year until it hits $30 billion a month. The Fed said it would ultimately have a balance sheet "appreciably below that seen in recent years but larger than before the financial crisis" in part because the Fed expects banks to maintain higher demand for reserves supplied by the central bank. But that is a pretty broad end point given that the Fed held roughly $800 billion in assets before the financial crisis and $4.5 trillion now (source: Business Insider).
Information courtesy of Bill Holmes with Front Street Mortgage