Fed & Monetary Policy: Balance Sheet

FEDERAL RESERVE BANK & MONETARY POLICY

BALANCE SHEET

key sources of information on FED & MONETARY POLICY

The following are links to information on the Federal Reserve's roles and activities relating to monetary policy:

PRIMARY MONETARY POLICY TOOLS OF THE FEDERAL RESERVE

Federal Funds Rate Actions (see Fed & Monetary Policy: Fed Funds)
Fed raises or lowers the Fed Funds rate to tighten or loosen monetary policy.

Large Scale Asset Purchases (LSAPs):
Taking actions that affect the size and composition of the Fed’s balance sheet through purchases or sales of longer-term securities in the open market. These Federal Reserve actions either reduce or increase the quantity of such assets available for purchase. The increased scarcity or greater supply tends to raise or lower the price of these securities and depress or increase their yields. Balance sheet policies can reinforce the credibility of the forward guidance if these policies are seen as a signal that the Fed intends to sustain such policies.

Forward Guidance:
Fed credibly conveys publicly that they will likely pursue a path for the Fed funds rate that is either lower than previously anticipated to put downward pressure on longer-term interest rates or higher than previously anticipated to put upward pressure on longer-term interest rates.

FEDERAL RESERVE BALANCE SHEET

**Composition of Total Liabilities and Capital**

Assets - Fed Balance Sheet

U.S. Treasury Securities - U.S. Treasury securities in form of notes and bills.
Agency MBS - Agency MBS securities of Fannie Mae, Freddie Mac and Ginnie Mae.
Repurchase Agreements - the Federal Reserve Bank of New York (FRBNY) may engage in the purchase of securities under agreement to resell.
Liquidity & Credit Facilities - facilities to purchase various types of loans to provide liquidity to financial institutions, commercial paper issuers, corporations, small companies and municipalities.
Central Bank Liquidity Swap Facilities - are designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.

Liabilities - Fed Balance Sheet

Federal Reserve Notes - currency of the United States collateralized by U.S. Treasuries, federal agency and GSE securities.
Depository Institution Deposits - banks deposit their required reserve balances and excess reserve balances.
Treasury Deposits - this is the general account of the U.S. Treasury as fiscal agent and depositary of the United States.
Reverse Repurchase Agreements - the FRBNY may engage in sales of securities under agreements to repurchase.

HISTORICAL PERSPECTIVE ON FED BALANCE SHEET

**Change in Balance Sheet Since COVID Peak**

**Fed Balance Sheet History Since 1914**

FROM THE BEGINNING (1914) TO 2007:

Small balance sheet - ~$900 billion.
U.S. Treasuries only.
Liabilities - predominantly FRB notes or money in circulation, which must be collateralized by U.S. Treasuries, federal agency and GSE securities.
Liabilities - nominal bank deposits for required reserves.

THE GREAT RECESSION AND FINANCIAL CRISIS:

Balance sheet grows 5X to over $4 trillion.
Agency MBS added; U.S. Treasuries expanded; liquidity support for the financial markets.
Significantly expanded excess bank reserve position.

POST GREAT RECESSION "NORMALIZATION":

Larger, expanded balance sheet (+$4 trillion).
"U.S. Treasury centric" holdings.
Agency MBS run-off.
Expanded excess bank reserve position.

GLOBAL COVID-19 PANDEMIC:

Larger, expanded balance sheet (>$8 trillion).
Expanded U.S. Treasury and Agency MBS holdings.
Liquidity programs for agency commercial MBS, municipal market and consumer and small business lending.
Significantly expanded bank reserve balances.

POST COVID-19 AND INFLATION BATTLE:

Large balance sheet (>$4 trillion) in an "ample reserves regime".
Primarily U.S. Treasury holdings.
Ample bank reserve balances.
As of mid-September 2022, Fed halted purchases of MBS.
Mid-March uptick due to banking industry concerns: failures, liquidity, depositor runs.

FEDERAL RESERVE BALANCE SHEET - COMPOSITION OF KEY ASSETS

BALANCE SHEET "PHASES": The Federal Reserve balance sheet management continues to evolve as economic and market events change. Since the Great Recession, the Fed has:

implemented Quantitative Easing
Balance Sheet “Normalization”
move toward U.S. Treasury-centric balance sheet
defended markets against COVID-19 impact
commenced tapering of COVID-19 support
Fed reacts to March 2023 banking crisis

Balance Sheet of Federal Reserve: The balance sheet of the Federal Reserve has risen to $6.896 trillion.

The two largest assets are:

U.S. Treasury securities $4.316 trillion
Agency MBS securities $2.251 trillion

Other Assets total $0.329 trillion and include repurchase agreements and liquidity & credit facilities.

The graphic shows the changes to the major portfolio holdings since the 2008:

Quantitative Easing, or QE, saw a significant expansion of the balance sheet from 2008 to 2017;
During the “normalization” phase, there was a wind down in the size of the balance sheet up to mid-2019;
In August 2019, the Fed started to pursue a “Treasury-centric” balance sheet by allowing the run-off in MBS portfolio to be reinvested in U.S. Treasuries; and
In March 2020, the Fed announced a program to provide liquidity to the markets in response to the COVID-19 crisis.
In May 2022, the Fed announced that it intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).
In March 2023, the Fed increased usage of its Credit & Liquidity Facilities to provide liquidity to select banks experiencing deposit runs.

u.s. treasury securities holdings

U.S. Treasury Holdings of Federal Reserve: $4.316 trillion in U.S. Treasury holdings.

U.S. Treasury holdings peaked at $5.771 trillion in June 2022 - up $3.4 trillion during this COVID pandemic.

Fed tapering started in November 2022 and continues.

**Fed U.S. Treasury Securities Holdings**

agency MORTGAGE-BACKED SECURITIES (mbs) holdings

MBS Holdings of Federal Reserve: $2.251 trillion in agency MBS holdings (residential and commercial).

MBS holdings peaked at $2.743 trillion in April 2022 - up $1.3 trillion during this COVID pandemic.

Fed tapering started in November 2022 and continues.

LOAN & CREDIT FACILITIES

**Loan and Credit Facilities** - mid-March 2023 jump due to banking industry concerns.

**Primary Credit and Bank Term Funding Program During March 2023 Bank Liquidity Crisis**

**Primary Credit and Bank Term Funding Program**

FEDERAL RESERVE BALANCE SHEET - SUMMARY OF KEY FUNDING SOURCES

The three primary funding sources used by the Federal Reserve include FRB notes or money in circulation, excess reserve deposits from commercial banks and deposits of the U.S. Treasury with reverse repurchase agreements used to supplement funding needs.