Understanding the Federal Reserve Balance Sheet

The Fed balance sheet is a financial statement published once a week that shows what the Federal Reserve (Fed) owns and owes. ... What Is Credit ... TableofContents Expand TableofContents TheFed'sBalanceSheet TheFed'sAssets TheFed'sLiabilities TheFed'sBalanceSheetExpansion TheBottomLine MonetaryPolicy FederalReserve Partof UnderstandingtheRoleoftheFed PartOf UnderstandingtheRoleoftheFed ExploreTheGuide Overview CentralBanks Overview CentralBank CentralBanksandInterestRates FinancialRegulators WhoDeterminesInterestRates? MonetaryPolicyvs.FiscalPolicy IntroductiontotheFed Overview 1913FederalReserveAct HowtheFederalReservewasFormed FederalReserveBoard FederalOpenMarketCommittee(FOMC) WhyIstheFederalReserveIndependent? TheFed'sRolesandFunctions Overview WhatDotheFederalReserveBanksDo? TheFederalReserveChair'sResponsibilities HowtheFederalReserveCreatesMoney FederalReserveBalanceSheet ReserveRequirements ReserveRatioDefinition InterestRateCutsandConsumers FedFundRateHikesandtheUSDollar OpenMarketOperations TightMonetaryPolicy ExpansionaryPolicy Taylor'sRule The FederalReserveSystemisthecentralbankoftheUnitedStatesandconductsthenation'smonetarypolicy.TheprimarygoalsoftheFed'smonetarypolicyaretopromotemaximumemployment,stableprices,andmoderatelong-terminterestrates.TheFedalsoseekstoensurethestabilityofthefinancialsystem. TheFedusesitsbalancesheettohelpitaccomplishthosegoals.TheFeddecideswhatassetsitholds,andwhethertoexpandorshrinkitsholdings.WhentheFederalReservebuysdebtinstrumentslikeTreasurynotesormortgage-backedsecurities,itisseekingtoincreasetheirpriceandloweryields,whilesignalingaloosermonetarypolicytosupporttheeconomy.Conversely,thesaleofFedassetsisapolicytighteningapproachthatconstrainsfinancialconditionsandassetvalues. TheFederalReservehasdramaticallyexpandeditssecuritiesholdingstocushiontheeconomicshocksofthe2008globalfinancialcrisisand,later,theCOVID-19pandemic. KeyTakeaways TheFederalReserveregularlydisclosestheassetsandliabilitiesonitsbalancesheetTheFed'sassetsincludeTreasuriesandmortgage-backedsecuritiespurchasedunderlargescaleassetpurchaseprograms(LSAPs).FedliabilitiesincludeU.S.currencyincirculationandthereservesdepositedbycommercialbanks.Duringeconomiccrises,theFedcanexpanditsbalancesheetbybuyingmoreassetsunderLSAPs,apolicyalsoknownasquantitativeeasing(QE). TheBalanceSheetoftheFederalReserveBank Likeanybalancesheet,theFed'sshowsitsassetsandliabilities.TheFeddisclosesitweeklyinTable5ofitsH.4.1report. TheFed'sassetsconsistprimarilyof U.S.Treasurynotesandbondsandagencymortgage-backedsecurities.ItsliabilitiesaremostlyU.S.currencyincirculation,bankreservesheldinFedaccounts,andreverserepurchaseagreementscollateralizedbyTreasurysecurities. FinancialmarketparticipantshavelongtrackedchangesintheFed'sbalancesheettomonitoritsimplementationofmonetarypolicy.LargescaleassetpurchasesfirstusedtoaddresstheglobalfinancialcrisisincreasedthecomplexityoftheFedbalancesheet,drawingheavypublicscrutiny. TheFed'sAssets AnythingtheFederalReservebuysisanasset.SincetheFederalReservehasanunlimitedsupplyofcurrencyforassetpurchases,thesizeofitsbalancesheetisconstrainedprimarilybytheavailabilityofeligibleassetsaswellaspracticalconsiderationsofpoliticsandpolicy. TreasurySecurities Traditionally,theFed'sassetshavemainlyconsistedofU.S.Treasurysecurities.Treasurysecurities,primarilynotesandbonds,accountedfor$5.76trillionoftheFed's$8.94trillioninassetsasofMarch31,2022. Treasurynotesareissuedinmaturitiesrangingfromtwoto10years,whileTreasurybondshavematuritiesofmorethan10years.Treasurybills,orT-bills,areshort-termdebtwithmaturitiesoffour,eight,13,26,and52weeks. Mortgage-BackedSecurities Mortgage-backedsecurities,whichentitlebuyerstocashflowsfromabasketofmortgageloans,arethesecondlargestassettypebyvalueontheFed'sbalancesheet.Thesefixed-incomesecuritiesarecreatedandsoldtoinvestorsbybanksandfinancialinstitutions,includinggovernment-sponsoredenterpriseslikeFannieMaeandFreddieMac.TheFedowned$2.72trillionofmortgage-backedsecuritiesasofMarch31,2022. OtherFedAssets Fedassetsalsoincludeloansextendedtobanksthroughtherepoanddiscountwindow,lendingunderavarietyofcreditfacilitiesestablishedtosupportsmoothfunctioningofcreditmarketsandeconomicgrowth,andforeigncurrencyheldundercentralbankliquidityswapsensuringtheavailabilityofdollarsforforeigninstitutions. TheFed'sLiabilities Currencyincirculation,includingasignificantproportioninuseoverseasaswellasanydollarbillsinyourpocket,washistoricallythelargestFederalReserveliability,untilitwassurpassedin2010bybankreservesondepositwiththeFed.Since2019,theovernightratetheFedpaysonbankreserveshasbeenitsprimarytoolinsettingthefederalfundsrate. Fedliabilitiesof$8.9trillionasofMarch31,2022included$4.6trillionindepositsbybanksandtheU.S.Treasury,$2.22trillioninFederalReservenotes(i.e.,currencyincirculation),and$2.04trillioninreverserepurchaseagreements. Reverserepurchaseagreements,orreverserepos,areborrowingsofTreasuriesfromcommercialcounterpartiesusedtoholdthefederalfundsrateintheFed'stargetedrange. WhenabankconvertssomeofitsFedreservebalanceintocurrency,itincreasescurrencyincirculationanddecreasesreservesondepositwiththeFedaccordinglywithoutchangingtheoveralllevelofFedliabilities. TheFed'sBalanceSheetExpansion Quantitativeeasing (QE),orlargescaleassetpurchaseswerefirstusedbytheFedinthewakeofthe2008globalfinancialcrisistoaddressthezerolowerboundproblem,whichiswhathappenswhenacentralbankdropsshort-termratestozerobuttheeconomyfailstoreturntoitsexpectedgrowthtrajectory. Inadditiontodirectlyloweringlong-terminterestratesbypurchasinglong-datedsecurities,quantitativeeasingisalsointendedtosignalthecentralbank'sbiastowardloosermonetarypolicyasafurthergrowthspur.ThesignalingfunctionofquantitativeeasinghasattimesensuredthatbenchmarkbondyieldsrosewhiletheFedwasbuyingonlytodroponcethepurchaseprogramwasdiscontinued. TheFederalReserveconductedthreeroundsoflargescaleassetpurchasesbetween2008and2014.TheFedresumedassetpurchasesonadramaticallyexpandedscaleamidtheeconomicslumpintheearlystagesoftheCOVID-19pandemic,buying$1.7trillionofTreasurysecuritiesbetweenthemiddleofMarchandtheendofJunein2020. TheBottomLine AllofusareconnectedtotheFed'sbalancesheetinonewayoranother.ThecurrencynotesthatweholdareliabilitiesoftheFed,asarebankreservesboostedbyourdeposits.TheFed'sassetsincludearangeofcreditlinesestablishedtoensuretheeconomy'sstabilityattimesofcrisis,aswellasU.S.Treasurieswealsoholdininvestmentportfolios.ChangesinthelevelandcompositionoftheFed'sbalancesheetcanultimatelyaffectallU.S.consumersandbusinesses. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. FederalReserve."AbouttheFed." BoardofGovernorsoftheFederalReserveSystem."RecentBalanceSheetTrends." FederalReserve."FactorsAffectingReserveBalances:AbouttheRelease." FederalReserve."FactorsAffectingReserveBalances-H.4.1." BoardofGovernorsoftheFederalReserveSystem."TheFederalReserve'sBalanceSheet." BoardofGovernorsoftheFederalReserveSystem."FederalReserveLiabilities." FederalReserve."FactorsAffectingReserveBalances,March31,2022." BoardofGovernorsoftheFederalReserveSystem."QuarterlyReportonFederalReserveBalanceSheetDevelopments." FederalReserveBankofSt.Louis."HowtheFedHasRespondedtotheCOVID-19Pandemic." CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description PartOf UnderstandingtheRoleoftheFedGuide FederalReserveSystem(FRS)Definition 1of23 WhatCentralBanksDo 2of23 HowCentralBanksAffectInterestRates 3of23 FinancialRegulators:WhoTheyAreandWhatTheyDo 4of23 WhoDeterminesInterestRates? 5of23 MonetaryPolicyvs.FiscalPolicy:What'stheDifference? 6of23 1913FederalReserveActDefinition 7of23 HowtheFederalReserveWasFormed 8of23 FederalReserveBoard(FRB)Definition 9of23 WhatIstheFederalOpenMarketCommittee(FOMC)? 10of23 WhyIstheFederalReserveIndependent? 11of23 WhatDotheFederalReserveBanksDo? 12of23 TheFederalReserveChair'sResponsibilities 13of23 UnderstandingHowtheFederalReserveCreatesMoney 14of23 UnderstandingtheFederalReserveBalanceSheet 15of23 ReserveRequirements 16of23 TheReserveRatioExplained 17of23 HowInterestRateCutsAffectConsumers 18of23 HowtheFedFundsRateHikesAffecttheUSDollar 19of23 WhatAreOpenMarketOperations(OMO)? 20of23 WhatIsaTightMonetaryPolicy? 21of23 ExpansionaryPolicyDefinition 22of23 TaylorRule 23of23 RelatedArticles Mortgage HowtheFederalReserveAffectsYourMortgage FederalReserve HowDoestheFedReduceItsBalanceSheet? GovernmentSpending HowDotheFed'sOpenMarketOperationsAffecttheU.S.MoneySupply? FederalReserve OpenMarketOperationsvs.QuantitativeEasing:What’stheDifference? MonetaryPolicy WhyDeflationIsTheFed'sWorstNightmare InterestRates WhatHappenstoInterestRatesDuringaRecession? PartnerLinks RelatedTerms FedBalanceSheetDefinition TheFedbalancesheetisafinancialstatementpublishedonceaweekthatshowswhattheFederalReserve(Fed)ownsandowes. more WhatIsCreditEasing? Crediteasingisusedtorelieveamarketgoingthroughturmoil.Crediteasinghappenswhencentralbankspurchaseprivateassetssuchascorporatebonds. more CentralBankDefinition Acentralbankconductsanation'smonetarypolicyandoverseesitsmoneysupply. more FederalReserveSystem(FRS)Definition TheFederalReserveSystemisthecentralbankoftheUnitedStatesandprovidesthenationwithasafe,flexible,andstablefinancialsystem. more WhoIsBenBernanke? BenBernankewasthechairoftheboardofgovernorsoftheU.S.FederalReservefrom2006to2014. more RepurchaseAgreement(Repo)Definition Arepurchaseagreementisaformofshort-termborrowingfordealersingovernmentsecurities. more