The Federal Reserve's balance sheet shrank again as potential borrowers shied away from the central bank's discount lending window and as credit provided for certain programs decreased.

The Fed's asset holdings in the week ended July 1 shrank to $2.01 trillion, from $2.03 trillion a week earlier, the central bank said.

Total discount window borrowing fell to $119.07 billion on Wednesday, from $132.66 billion a week earlier.

Borrowing by commercial banks through the Fed's discount window also fell, to $35.71 billion on Wednesday from $49.20 billion a week earlier.

Borrowing by primary dealers through a credit facility created after the collapse of Bear Stearns remained at zero for an eighth-straight week.

Overall borrowing from the Fed's discount window has declined as the central bank shifts from providing direct loans to institutions to providing credit extensions aimed at soothing strains in certain sectors of the market.

The Fed's portfolio of Treasury securities in the latest week rose by $10.27 billion, to $663.47 billion, and its holdings of mortgage-backed securities dropped to $462.44 billion, from $467.23 billion a week earlier.

The Fed's net portfolio holdings in connection with its commercial-paper funding facility fell $9.34 billion in the latest week, to $114.69 billion.

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