Fed Balance Sheet - Explained
What is the Federal Reserve Balance Sheet?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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Fed Balance Sheet - Explained
The Fed balance sheet refers to the breakdown of the assets, as well as, liabilities which the Federal Reserve holds. This report lists the factors affecting the absorption and supply of Federal Reserve funds. The Fed balance sheet report shows the means used by the Fed to pump cash into the economy. This is also referred to as the Factors Affecting Reserve Balances Report.
Why is the Fed Balance Sheet Important?
The Fed's balance sheet was a sleepy topic for much of financial history. The weekly balance sheet report became reknown in the media during the financial crisis which started in 2007. When launching their quantitative easing in response to the financial crisis, the Fed balance sheet made analysts have an idea of the scale and scope of Fed market operations then. Specifically, the Fed balance sheet gave analysts access to information surrounding the expansionary monetary policy implementation utilized during the crisis of 2007-2009. Quantitative easing (QE) was a unique monetary policy in which a Central Bank bought government securities or other securities from the market in order to reduce rates and raise the money supply. Utilizing the Fed's balance sheet via quantitative easing continues to be controversial. Although efforts obviously assisted in easing bank's liquidity problems, critics contend QE was a major setback was the distortion of free-market principles. Today, markets are still clarifying the short-term bump but longer-term disadvantages of the government intervening. The Brookings Institute's Hutchins Center concludes the Fed's balance sheet best: like any other entity, the Federal Reserve has assets (majorly U.S. Treasury debt, as well as, mortgage-backed securities) and liabilities (majorly money deposited by commercial banks at the Fed plus outstanding currency). What makes the fed different is its ability to expand its balance sheet freely by (electronically) printing money (technically, bank reserves) and making use of that money to purchase Treasuries in the open market. If you are more curious, you can always check balance sheet information here.
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