What Is the Federal Reserve’s Balance Sheet?

UTC by John Caroline · 5 min read
What Is the Federal Reserve’s Balance Sheet?
Photo: Depositphotos

Do you want to know more about the Federal Reserve and its balance sheet? Here’s is all you need to know about the document used to promote employment, price stability, and long but moderate interest rates.

The Federal Reserve works with a large balance sheet containing many individual assets and liabilities. The Federal Reserve’s balance sheet contains a wealth of information about the scope and scope of its operations. For decades, market participants have analyzed developments on the Fed’s balance sheet to better understand the important details of the conduct of monetary policy. In recent years, the development and introduction of several new credit products that address the financial crisis have complicated the Federal Reserve’s balance sheet and increased public interest in it.

Every week, the Fed releases its balance sheet around 4:30 p.m. on Thursday. The balances are included in Federal Reserve Statistical Publication H.4.1, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks”.

Federal Reserve Balance Sheet Defined

The balance sheet of the Federal Reserve System refers to the balance sheet of the Federal Reserve System of the United States, also known as the Central Bank. The Federal Reserve balance sheet manages all liabilities and assets in a comprehensive balance sheet. The basic purpose of the balance sheet is to promote employment, price stability, and long but moderate interest rates. Also, on the agenda is using the Fed’s balance sheet to keep the economy stable and the dollar appreciates. The Fed’s balance sheet is unique in that it expands by purchasing Treasury bills into electronically printed money. Unlike a traditional balance sheet, the central bank updates this balance sheet weekly. The balance sheet changes as a result of job creation, inflation control, price stability, or long-term interest rate control. It shapes a country’s monetary policy. It controls the money supply in the economy to control inflation or deflation by changing economic policies that control bank interest rates.

The Fed’s Assets

Everything bought by the Federal Reserve is an asset. The Fed has an unlimited number of currencies in which to purchase assets, so the size of its balance sheet is limited mainly by the availability of fixed assets and by practical policy and policy considerations. The Fed’s assets traditionally have primarily been US Treasuries. As of March 31, 2022, $5.76 trillion of the $8.94 trillion in assets of the US Federal Reserve System (Fed·Fed) were classified as government bonds and notes. Treasuries have maturities of 2 to 10 years, while Treasury bonds have maturities of 10 years or more. Treasury bonds or government securities are short-term debt with maturities of 4, 8, 13, 26, and 52 shares.

The second-largest asset class by value on the Fed’s balance sheet is Mortgaged-backed securities that give buyers the right to receive cash flows from a basket of mortgage loans. These fixed-income securities are produced and sold to investors by banks and financial institutions, including government-backed companies such as Fannie Mae and Freddie Mac. As of March 31, 2022, the Fed had $2.72 trillion in mortgage-backed securities.

Fed assets include bank lending via the repo and discount windows, borrowing under some credit facilities which are designed to support the continued operation of credit markets and economic growth, and foreign currency held under central bank liquidity swaps to ensure dollar availability.

The Fed’s Liabilities

The Fed’s liabilities are made up of all the U.S. dollars in circulation. Most often, the Fed’s liabilities are specifically made up of all the US currencies that are in circulation but are not within the custody of the Fed itself.

Moreso, all the deposits of commercial banks and other financial institutions that are held by the Fed in accordance with bank reserve requirements are also noted as liabilities on the Fed’s balance sheet. Another category that makes up the Fed’s liabilities is the “Reverse Repos”, they are known to be the treasury borrowers from commercial banks who are responsible for holding the rate of federal funds.

Quantitative Easing

Quantitative easing is one of the notable factors that affect the balance sheet of the Fed. Basically, it is a procedure where the Federal Reserve decides to print more money, while also acquiring more securities in the open capital markets. The decision to practice quantitative easing is made in a bid to boost the supply of money in circulation, to enable the Fed to stimulate lending by banks, including investment by companies and individuals.

However, there’s a slight change in the Fed’s approach to quantitative easing as it now purchases a higher amount of corporate bonds in addition to the US Treasury bonds, repurchase agreements, MBS, gold stock, and other securities that the Fed ordinarily purchases.

Impact of The Fed’s Balance Sheet on the US Economy

The Fed’s balance sheet apparently represents a scale of the monetary nature and behavior of the US economy. Hence it has a notable influence on the economy. The Fed’s balance sheet is often leveraged by the officials to stimulate the economy.

They can as well achieve a longer-term interest rate with the sheet. They tend to purchase additional assets and expand their asset portfolio to cause a change in the economy. The sheet gained significant attraction at the time of the 2008 Global Financial Crisis. A similar occurrence also played during the COVID-19 pandemic of 2020. The Fed’s sheet has been an effective infrastructure during periods of the financial crisis and it has been so far recorded as an aid to manage the stability of the US economy.

Final Thoughts

On a good thought, it is expedient to learn and understand the details about the Fed’s balance sheet as everyone can be deemed somewhat accountable to the Fed’s balance sheet. There is no doubt that the currency is globally used, hence every US currency held by an individual is a liability of the Fed.

This means that everyone is responsible for the stability of the US economy as changes in the level and composition of the Fed’s balance sheet can arguably affect all U.S. consumers and businesses.

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FAQ

What is the Fed's balance sheet?

The balance sheet of the Federal Reserve System refers to the balance sheet of the Federal Reserve System of the United States, also known as the Central Bank. It is an infrastructure adopted to manage the liabilities and assets of the Federal Reserve.

How does the Fed's balance sheet function?

The Fed’s balance sheet is used to promote employment, price stability, and long but moderate interest rates. Also, on the agenda is using the Fed’s balance sheet to keep the economy stable and the dollar appreciates. The Fed’s balance sheet is unique in that it expands by purchasing Treasury bills into electronically printed money.

Why is the Fed Balance Sheet Important?

The Fed balance sheet is important because it plays a major role in stimulating the US economy.

What happens when the Fed reduces its balance sheet?

When the Fed reduces its balance sheet, the interest rates increase consequently. Meanwhile, as rates increase, the money supply in the American financial system gets reduced. Therefore, this leads to lesser availability of credit to the consumers.

What are the biggest liabilities of the Fed?

The biggest liabilities of the Fed include all the US currency in circulation.

What assets does the Fed own?

Everything acquired by the Federal Reserve is an asset to it. Securities held outright total about 95 percent of the Fed’s total balance sheet. Nearly two-thirds are Treasury securities, including shorter-term Treasury bills, notes, and bonds. Mortgage-backed securities make up almost one-third.

How did the Fed use its balance sheet during the coronavirus crisis?

The Fed adopted the Quantitative easing technique during the coronavirus crisis in 2020. To start with, the Fed significantly reduced the interest rates to zero after which it acquired at least $500 billion in Treasury securities and $200 billion in agency mortgage-backed securities.

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