What is the Federal Reserve's Balance Sheet? - Bankrate

The Fed's balance sheet is a financial statement updated weekly that shows what the U.S. central bank owes and owns. More officially, it's the ... SkiptoMainContent Weareanindependent,advertising-supportedcomparisonservice.Ourgoalistohelpyoumakesmarterfinancialdecisionsbyprovidingyouwithinteractivetoolsandfinancialcalculators,publishingoriginalandobjectivecontent,byenablingyoutoconductresearchandcompareinformationforfree-sothatyoucanmakefinancialdecisionswithconfidence. Bankratehaspartnershipswithissuersincluding,butnotlimitedto,AmericanExpress,BankofAmerica,CapitalOne,Chase,CitiandDiscover. HowWeMakeMoney. 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Theoffersthatappearonthissitearefromcompaniesthatcompensateus.Thiscompensationmayimpacthowandwhereproductsappearonthissite,including,forexample,theorderinwhichtheymayappearwithinthelistingcategories.Butthiscompensationdoesnotinfluencetheinformationwepublish,orthereviewsthatyouseeonthissite.Wedonotincludetheuniverseofcompaniesorfinancialoffersthatmaybeavailabletoyou. Writtenby SarahFoster Writtenby SarahFoster U.S.economyreporter SarahFostercoverstheFederalReserve,theU.S.economyandeconomicpolicy.ShepreviouslyworkedforBloombergNews,theChicagoTribuneandtheChicagoDailyHerald. SarahFoster June14,2022 / 6minread Editedby MaryWisniewski Editedby MaryWisniewski Bankingeditor MaryWisniewskiisabankingeditorforBankrate.Sheoverseeseditorialcoverageofsavingsandmobilebankingarticlesaswellaspersonalfinancecourses.   MaryWisniewski June14,2022 / 6minread Sharethispage Facebooklogo Facebook Twitterlogo Twitter LinkedInlogo LinkedIn email-icon Email BankrateLogo WhyyoucantrustBankrate Moreinfo Whileweadheretostricteditorialintegrity,thispostmaycontainreferencestoproductsfromourpartners.Here'sanexplanationforhowwemakemoney. BankrateLogo WhyyoucantrustBankrate Foundedin1976,Bankratehasalongtrackrecordofhelpingpeoplemakesmartfinancialchoices.We’vemaintainedthisreputationforoverfourdecadesbydemystifyingthefinancialdecision-makingprocessandgivingpeopleconfidenceinwhichactionstotakenext. 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Bankrate.comisanindependent,advertising-supportedpublisherandcomparisonservice.Wearecompensatedinexchangeforplacementofsponsoredproductsand,services,orbyyouclickingoncertainlinkspostedonoursite.Therefore,thiscompensationmayimpacthow,whereandinwhatorderproductsappearwithinlistingcategories.Otherfactors,suchasourownproprietarywebsiterulesandwhetheraproductisofferedinyourareaoratyourself-selectedcreditscorerangecanalsoimpacthowandwhereproductsappearonthissite.Whilewestrivetoprovideawiderangeoffers,Bankratedoesnotincludeinformationabouteveryfinancialorcreditproductorservice. 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Buteventhoughit’shardtotranslateFedspeakintoeverydayEnglish,thisisn’tatopictoignore.WhilemostconsumersfocusonwhethertheFedisraisingorloweringinterestrates,thisbehind-the-scenesaspectofFedpolicyhasmajorimplicationsfortheU.S.economy,thestockmarket,monetarypolicyandyourpocketbook.It’sallcomingtoaheadofficiallyonJune15,whenthebalancesheetofficiallystartstoshrink. Here’severythingyouneedtoknowabouttheFed’sbalancesheet,includingwhatitis,whyit’simportantandhowitcouldimpactyou. WhatistheFed’sbalancesheet? Youprobablyhaveanideaofthedifferenttypesofdebtsyoumayowe,suchasstudentloans,creditcardsoramortgage.Inaccountingterms,thoseareconsideredliabilities.Incontrast,thethingsyouown—stocks,bondsorahouse,forexample—areconsideredassets. ThesamegoesfortheFed. TheFed’sbalancesheetisafinancialstatementupdatedweeklythatshowswhattheU.S.centralbankowesandowns.Moreofficially,it’stheFed’sH.4.1statement. TheFed’sassetsandliabilities U.S.papercurrency,aswellasmoneythatcommercialbanksholdinaccountsattheFed,arecountedasaliability.Treasurysandothersecurities,ontheotherhand,areconsideredassets. Securitiesheldoutrightmakeupabout95percentoftheFed’stotalbalancesheet.Nearlytwo-thirdsareTreasurysecurities,includingshorter-termTreasurybills,notesandbonds.Mortgage-backedsecuritiesmakeupanotheralmostone-third. TheFed,bylaw,canonlypurchasegovernment-backeddebt,butinsevereemergencies,it’llcreateaspecial“lendingfacility”thatit’llfund,alongwithfundingfromtheTreasuryDepartmentasabackstop.Then,it’llusethatfacilitytopurchaseothertypesofdebt,suchascorporateormunicipalbonds.ThosespecialfacilitiesarethenlistedontheFed’sbalancesheet,astheywereintheaftermathofthecoronaviruscrisis. AsofJune14,theFed’sbalancesheettotaled$8.97trillion. HowdoestheFed’sbalancesheetimpacttheeconomy? TheFed’sbalancesheetisimportantbecauseofficialsuseittoinfluencelonger-terminterestrates.Whenofficialswanttostimulatetheeconomy,theybuymoreassetsandexpandtheirassetportfolio.Whentheywanttorestrictgrowth,theyletassetsrolloffandshrinktheirbalancesheet. ThebalancesheethasdrawnnationalattentionsincetheGreatRecession.InNovember2008,then-FedChairmanBenBernankefacedafinancialpanic.TheFedreducedinterestratestovirtuallyzero,butthatdecisionstillwasn’tenoughtojumpstartaneconomysufferingitsworstturmoilsincetheGreatDepression. Toinjectmorelifeintothefinancialsystem,theFedturnedtounconventionalandunprecedentedmeasures:Itstartedbuyinglong-termTreasurys,federalagencydebtandmortgage-backedsecuritiesto“increasetheavailabilityofcredit”forhomepurchasesandpropuptheeconomy,accordingtoaFedstatementfrom2008.Thatwasalsosupposedtolowerthelonger-terminterestratesthattheFeddoesn’tdirectlycontrolwithitsbenchmarkfederalfundsrate,providingmorestimulustotheeconomyandincentivizingmoreborrowingandlending. Thesepurchasesweredubbed“quantitativeeasing,”orQE,byfinancialexperts.TheFed,however,prefers“large-scaleassetpurchases,”saysJoePavel,seniormediarelationsspecialistattheboardofgovernorsoftheFed. Thisprocesscausedthebalancesheettoballoon.InAugust2007,beforethefinancialcrisishit,theFed’sbalancesheettotaledabout$870billion.ByJanuary2015,afterthoselarge-scaleassetpurchaseshadoccurred,itsbalancesheetswelledto$4.5trillion. Beforethesemeasures,peopleweren’tinterestedintheFed’sfinances,saysKennethKuttner,aprofessorofeconomicsatWilliamsCollegewhohasresearchedunconventionalmonetarypolicy. “Itwasthemostboringthingintheworld—likewatchingpaintdry,”Kuttnersays.“Quantitativeeasingchangedallthat.” HowtheFeduseditsbalancesheetduringthecoronaviruscrisis TheFedwasevenbolderwithitscrisisinterventionsduringtheCOVIDpandemic,withthreedifferentiterationsofQEcombiningtoexpandthebalancesheetpast$8.9trillion. AfterslashinginterestratestozeroinanemergencymeetingonMarch15,2020,theFeddidn’tevenwaitformoreeconomicdatatoknowitneededtogetmoreaggressivewithstimulatingtheeconomy.Thatsameday,theFedalsosaiditwouldbuyatleast$500billioninTreasurysecuritiesand$200billioninagencymortgage-backedsecurities. ByMarch23,2020,theFedeffectivelycreatedanunlimitedbond-buyingprogram,withofficialsagreeingtobuythosesameassets“intheamountsneededtosupportsmoothmarketfunctioningandeffectivetransmissionofmonetarypolicytobroaderfinancialconditions.” BeginninginJune2020,theFedofficiallyannouncedthatitwouldpurchase$80billionworthofTreasurysecuritiesand$40billionmortgage-backedassetsamonth. TheFedalsocreatednewemergencylendingprograms,someofwhichpurchasedmunicipalbondsandcorporatedebtforthefirsttimeinFedhistory.TheyalsoaddeduptoexpandtheFed’sportfolio. Whythebalancesheetmattersforconsumers ConsumershavetheFedtothankfortherecord-lowmortgageratesduringthepandemic.InthemonthsaftertheFed’smassivebond-buyingprogram,theaveragecostoffinancingahomewitha30-yearfixedmortgagedippedtoaslowas2.93percentinlateJanuary,accordingtoBankratedata. ButthenextimportantphaseintheFed’scrisisresponsewillsooncome—normalizingpolicy.Becauseamassivebalancesheethasastimulativeeffectontheeconomy,theFedwilleventuallyapproachnormalizingit. OfficialsannouncedinMaythattheywouldofficiallystartshrinkingtheirbalancesheetinJune.Insteadofreinvestingtheproceedsofmaturitysecurities,theFedwillsimplyletthoseexpiredsecuritiesrolloff,withthefirstbatchsettomaturebyJune15.Atthecurrentpace,officialswant$47.5billionworthofsecuritiestorolleachmonthbetweenJuneandAugust.Then,itwillincreasethatamountto$95billionbySeptember. Ifhistoryisanyguide,theprocesswon’tbeeasy.Thebalancesheetnormalizationprocesshasledtoextrememarketvolatilityevenwhenofficialstooktheprocessmuchmoreslowly.Forexample,whenFedChairmanJeromePowellsaidafteraDecember2018Fedmeetingthatthequantitativetighteningprocesswason“autopilot,”investorsgrewjitterythattheFedmayreigninthebalancesheettoomuch,sendingstockstotheirworstDecembersincetheGreatDepression. Recentmarketvolatilitymightbemimickingthatperiod,asinvestorsprepareforamuchmoreaggressiveFedtocombatsoaringinflation.TheS&P500hastumblednearly22percenttostarttheyear,officiallyenteringbearmarketterritoryonJune13.Treasuryyieldsalsofollowedsuit,withthe10-yearratesoaringTuesdaytoan11-yearhighof3.49percentadayaftermakingitsbiggestone-daymovesinceMarch17,2020.The2-yearyieldroseto3.43percent,thehighestsinceNovember2007. Thattighteningspreadsthroughouttheeconomyandisnodoubtamajorreasonwhytheaverage30-yearfixedratemortgagehasrisenmorethan2percentagepointssinceDecember2020,accordingtoBankratedata. ThenormalizationprocessalsorisksdisruptingtheflowofcreditiftheFedtakestheprocesstoofar.That’sessentiallywhathappenedinSeptember2019,wheninterestratesskyrocketedinacomplicatedcornerofthemarketplace:therepo,orrepurchaseagreement,market. Therepomarketisaplacewherefinancialfirmsgoforshort-termloans,exchangingcashforsecurities.Trillionsofdollarsindebtarefinancedhere,includingU.S.governmentdebt.ExpertssaytheFed’sbalancesheetnormalizationprocessplayedanimportantroleinthedysfunction. “Thebankshadlessexcessreservestolend,”saysYung-YuMa,chiefinvestmentstrategistatBMOWealthManagement.“Ifwelookbackinhindsight,itwasthecasethattheFedreignedinthebalancesheettoomuch.” Whatnextstepsshouldconsumerstake? TheFed’sbalancesheetpoliciesareoftenwroughtwithunknowns.Allofthisunderscorestheimportanceoftuningoutvolatilityandmaintainingalong-termmindsetwithyourinvestments,aswellasbuildingupanemergencyfund.TheFed’sevenfasterwithdrawalofstimuluscouldleadtohigherlonger-termborrowingrates,suchasmortgages,underscoringtheimportanceofshoppingaround. It’slike“goingintoaforestthathasn’tbeenmappedbefore,”saysMarkHamrick,Bankrate’ssenioreconomicanalyst.TheFed“wasn’tsurewhatthey’dfindonthewayin,andgettingoutofthewoodsissimilarlyfraughtwithunknowns.” Butthebiggestbottomlineofall?Embracetheunconventional. “Consumers,investors,saversandborrowersshouldthinkaboutthis(quantitativeeasing)asoneofthetwomaintoolsinthecentralbank’stoolboxtohelpadjustthestrengthoftheU.S.economy,”Hamricksays.“ItremainstobeseenhowtheFedwilllearnhowbesttoemployitandwhetherthereareunintendednegativeconsequencesfromhavinginventedanddeployedit.” Writtenby SarahFoster U.S.economyreporter ReadmoreFromSarah SarahFostercoverstheFederalReserve,theU.S.economyandeconomicpolicy.ShepreviouslyworkedforBloombergNews,theChicagoTribuneandtheChicagoDailyHerald. Editedby MaryWisniewski Bankingeditor Youmayalsolike Taper,explained:HowtheFedplanstoslowitsbondpurchaseswithoutwreckingtheeconomy Whatisquantitativeeasing? FederalReserveraisesinterestratesbyahalfpointtofightsoaringinflation