Fed Balance Sheet

The balance sheet of the Federal Reserve, the central bank of the United States

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What is the Fed Balance Sheet?

The Fed balance sheet refers to the balance sheet of the Federal Reserve, the central bank of the United States. The Fed’s balance sheet is basically just like any other balance sheet – or more precisely, like the balance sheet of any other bank – it is a list and calculation of current assets and liabilities.

Fed Balance Sheet Screenshot

One distinction of the Fed’s balance sheet from the balance sheets of other banks or companies, which typically only run balance sheet calculations quarterly or annually, is that the Fed’s balance sheet is calculated and published every week.

However, unlike any other entity, a central bank can instantly change its balance sheet by printing a big pile of new money. The ability to, essentially, create money out of thin air is a power unique to central banks, such as the Federal Reserve.

Balancing the Fed – Assets

As noted, the Fed balance sheet reflects the Fed’s current assets and liabilities. So, what makes up the Fed’s assets and liabilities?

The assets that the Federal Reserve owns are primarily securities, which are mostly U.S. Treasury bonds. Treasury securities make up about 75%-90% of the Fed’s assets. Its other assets include the outstanding loans made to U.S. banks and other entities, mortgage-backed securities (MBS), and other Federal agency debt instruments purchased by the Fed.

The amount of MBS that the Fed holds expanded dramatically during the 2008 Global Financial Crisis. It is because the collapse of the housing market and the resulting massive mortgage loan defaults left many private investors in MBS with no outlet other than the federal government where they could sell their MBS holdings.

Balancing the Fed – Liabilities

The Federal Reserve’s liabilities consist of all the U.S. currency in circulation that is not held by the Fed itself, and all the deposits of commercial banks and other financial institutions that the Fed holds in accordance with bank reserve requirements.

One somewhat “tricky” point about the Fed balance sheet is that although currency in circulation is a liability for the Fed when it prints additional money (increasing the liability amount of currency in circulation) and then uses that money to buy additional securities, the purchased securities are assets on the Fed balance sheet.

The Fed’s current balance sheet is published weekly, every Thursday – it is also known as the H.4.1 report. Economic analysts, market analysts, and investors monitor the Fed’s balance sheet in order to see what moves the Federal Reserve is making in terms of expanding or contracting the money supply. Ever since the Global Financial Crisis of 2008, the Fed’s balance sheet specifically revealed how the Fed is going about implementing what came to be known as “quantitative easing” – or QE, for short.

Quantitative easing is a procedure where the Federal Reserve, in order to increase the money supply and, hopefully, to stimulate lending by banks and investment by companies and individuals, prints more money and buys more securities in the open capital markets.

One fairly recent change in the Fed’s practice of buying securities is the purchase of a higher amount of corporate bonds in addition to the U.S. Treasury bonds, repurchase agreements, MBS, gold stock, and other securities that the Fed ordinarily purchases.

Another step taken by the Fed, in response to the COVID-19 pandemic, is the creation of several emergency lending facilities that are designed to prevent a lack of liquidity in the credit markets and to help states manage their respective cash flows.

The new lending facilities include Corporate Credit Facilities for both the primary and secondary markets, a Commercial Paper Funding Facility, a Money Market Mutual Fund Liquidity Facility, and a Municipal Liquidity Facility that is designed to aid municipal and state governments.

The Significance of the Fed Balance Sheet

The Fed balance sheet massively expanded in the wake of the 2008 Global Financial Crisis, and then again in response to the COVID-19 pandemic of 2020. Before the crisis in 2008, the Fed balance sheet was less than $1 trillion – about $800 billion. However, by mid-2020, the Fed balance sheet is valued at more than $7 trillion.

The massive increase in the Fed balance sheet means, for one thing, that the Fed can make substantially larger moves in terms of buying and selling securities in the open market. It, in turn, means that changes in the Fed’s policy – that is, the extent to which it is expanding or contracting the money supply – exert greater effects on the overall economy.

It’s important to keep in mind that the Federal Reserve was allegedly created, in 1913, with the purposes of maintaining the value of U.S. currency, controlling interest rates and inflation, and avoiding major economic recessions or upheavals.

However, it’s also important to note that many critics charge that the Fed never effectively achieved any of its stated goals. Less than two decades after the Federal Reserve’s creation, the stock market crash and the Great Depression occurred – the Fed was largely ineffective in controlling runaway inflation in the 1970s – and its actions did not prevent the collapse of the housing market during the 2008 Global Financial Crisis.

Some critics argue that the only purpose that the Fed’s really effectively served is the preservation of its member banks – in short, that all the central bank really does is protect the banking industry, not the U.S. economy or U.S. citizens.

In any event, the Fed balance sheet is of great importance because it reveals the steps that the central bank is taking to either expand or rein in the country’s money supply. Although it risks higher interest rates and inflation rates, an expanding money supply usually stimulates the economy. On the other hand, contracting the money supply helps to hold down interest rates and inflation but risks stagnating the economy and increasing unemployment.

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