Federal Reserve Balance Sheet

8 Key excerpts on "Federal Reserve Balance Sheet"

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  eBook - PDF

  The Financial Crisis and Federal Reserve Policy

  • L. Thomas(Author)
  • 2011(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  And one must understand how the Fed can change the magnitude and composition of this balance sheet. Table 7-1 lists the components of the balance sheet, together with their magnitudes in September 2007, just prior to the onset of the Great Crisis. In chapter 9 , we study the enormous changes the Fed implemented in its balance sheet as it responded to the crisis. Assets of the Fed—that is, items that the Fed owns and claims it has on other entities—include gold certificate and special drawing rights accounts ( G), coins issued by the Treasury and held in the 12 Federal Reserve banks (Fca), loans to depository institutions (D), the Fed’s critically important portfolio of U.S. Treasury and other securities (P), items in the process of collection (IPC), and assets denominated in for- eign currency plus other Federal Reserve assets such as buildings and computers (OA). Liabilities of the Federal Reserve are its debts or the claims outside entities have on the Fed. These debts include Federal Reserve notes, that is, the paper currency issued by the Fed (FRN); deposits at the Fed owned by depository institutions (Fb), the U.S. Treasury (Ft), and foreign entities such as the International Monetary Fund and World Bank (Ff ); Federal Reserve Monetary Control 115 deferred availability items (DAI); and other liabilities like bills payable ( OL). The capital accounts of the Federal Reserve ( CAP) represent the owners’ stake in the Fed. This capital is simply the difference between the Fed’s total assets and its total liabilities; that is, capital is the Fed’s net worth. Technically, the Fed is owned by commercial banks that are members of the Federal Reserve System.

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  Money, Banking, Financial Markets & Institutions

  • Michael Brandl(Author)
  • 2020(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  177 CHAPTER 8 Central Banks during a financial crisis, that can be a daunting challenge. To understand how the Fed dealt with the financial crisis, it might be beneficial to take a look at the Fed’s balance sheet a little more in depth. So that is where we turn next: the Fed’s balance sheet and how it has changed recently. 8-3b The Fed’s Balance Sheet Examining balance sheets can be a dreadfully boring exercise. A balance sheet, with its different classes of assets and liabilities, can be a complex blur of names and numbers. If done properly, however, examining a balance sheet can provide a great deal of insight and trigger many inter-esting questions, such as “What on earth is going on?” and “Why did they do that?” And so it is with the balance sheet of the Federal Reserve. We first examine the Fed’s balance sheet as it stood on March 22, 2007, on the eve of the crisis that began in the summer of 2007. Then we will see how it changed radically over time in response to the crisis, arriving at its status on January 24, 2019. Examining the Fed’s balance sheet is much more than a dull exercise in accounting; instead, it offers us a window through which we can watch as the biggest economic crisis since the Great Depression batters US and global financial markets. A comparison of balance sheets of all of the Federal Reserve Banks looks like this: Assets (in billions $) March 22, 2007 March 26, 2008 March 25, 2009 March 25, 2010 May 8, 2013 Jan.

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  Money, Banking, Financial Markets and Institutions

  • Michael Brandl(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  All of these publications are free to the public. So, the Fed has a lot on its plate. It does so much more than just set and carry out monetary policy and thus influence interest rates. This became very clear during the financial crisis of 2007-2008. The Fed is responsible for keeping the financial markets functioning properly, and during a financial crisis that can be a daunting challenge. To understand how the Fed dealt with the financial crisis, it might be beneficial to take a look at the Fed’s balance sheet a little more in depth. So that is where we turn next: the Fed’s balance sheet and how it has changed recently. 8-3b The Fed’s Balance Sheet Examining balance sheets can be a dreadfully boring exercise. A balance sheet, with its different classes of assets and liabilities, can be a complex blur of names and numbers. If done properly, however, examining a balance sheet can provide a great deal of insight and trigger many inter-esting questions, such as “What on earth is going on?” and “Why did they do that?” And so it is with the balance sheet of the Federal Reserve. We first examine the Fed’s balance sheet as it stood on March 22, 2007, on the eve of the crisis that began in the summer of 2007. Then we will see how it changed radically over time in response to the crisis, arriving at its sta-tus on March 24, 2010. Examining the Fed’s balance sheet is much more than a dull exercise in accounting; instead, it offers us a window through which we can watch as the biggest economic crisis since the Great Depression batters US and global financial markets. Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience.

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  Financial Institutions

  Markets and Money

  • David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The components of the monetary base—vault cash and reserve balances— are the only assets that financial institutions can use to satisfy reserve requirements. By controlling the monetary base, the Federal Reserve can control the total amount of assets that financial institutions can use to meet their reserve requirements. The Federal Reserve uses its power over these reserves to control the amount of money outstanding in the country. MEASURES OF THE MONEY SUPPLY Up to this point, we used the term money supply conceptually without providing a specific definition or measure. The reason for this is that there are many different definitions of money, and each measure has a role in monetary policy. Some of the definitions of money are based on theoretical arguments over the definition of money—is money primarily trans- actional, or is money primarily a safe haven to store purchasing power? Putting theory aside, inside the Fed things are more practical; that is, what the Fed really wants to know is, when it increases or decreases the money supply, which definition of money has the greatest impact on interest rates, unemployment, and inflation. C H A P T E R P R E V I E W In Chapter 2, we explained what the Federal Reserve is and how it controls the total reserves in the banking system by initiating changes to its balance sheet. The purpose of Chapter 3 is to explain how the Fed conducts monetary policy, which is the primary policy tool that the federal government uses to stabilize the economy over the business cycle. In the chapter, we discuss how the Fed adjusts the money supply, the role of the fed funds rate in the conduct of monetary policy, the goals for monetary policy, and how monetary policy is transmitted through the various sectors of the economy. We also discuss fiscal policy, how it’s conducted, and its role in stabilizing the economy.

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  Modern Money Theory

  A Primer on Macroeconomics for Sovereign Monetary Systems

  • L. Randall Wray(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The final balance sheets of Bank A, Bank B, and the central bank look like this: Bank A balance sheet Assets Liabilities and NW Advance of Funds to Mr. X = $200 Building = $200 Debt to Federal Reserve = $200 Net Worth = $200 Bank A makes money as long as the interest it receives on the advance to Mr. X is higher than the interest it pays to the Federal Reserve. 96 Modern Money Theory The balance sheet of Bank B looks like this (assuming it did not have any reserves before): Bank B balance sheet Assets Liabilities and NW Reserves = $200 Checking Account of Car Dealer = $200 And the balance sheet of the central bank is (assuming that it did not provide any advances to banks or any cash): Federal Reserve Balance Sheet Assets Liabilities and NW Reserve Loan to Bank A = $200 Reserves = $200 Note that all these operations did not involve any transfer of physical cash – it was all bookkeeping entries through keystrokes to computers. Also note we only show the assets and liabilities directly related to our examples. Of course, private banks and the central bank have many other assets and liabilities, as well as net worth on their balance sheets. In practice, the central bank will usually not advance reserves to the bank directly in the form of an unsecured advance; instead it will ask for collateral (usually a treasury security) in exchange and will provide funds for less than the value of the collateral. So, if Bank A has a $300 bond, it surrenders it to the Federal Reserve in exchange for reserves. The Fed will usually give only, say, $285 if the discount is 5 percent. Box: Frequently asked questions Q: What is the relation between the accounting of debits and credits and the financial uses and sources approach? In my business school accounting classes I learned this a bit differently. A: In this Primer we use “T accounts” that are presented in every money and banking textbook.

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  Introduction to Finance

  Markets, Investments, and Financial Management

  • Ronald W. Melicher, Edgar A. Norton(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Coins and cash in the process of collection are about 2% of total assets. The remainder is assets that include gold cer- tificates and Fed premises. Federal Reserve notes (recall our discussion of fiat money in Chapter 2) represent nearly 90% of the Fed’s total liabilities and capital. Deposits in the form of depository insti- tution reserves held at the Reserve Banks are about 7% of the total. Other liabilities, particularly U.S. Treasury deposits and capital in the form of stock purchased by member banks and surplus earned from operations, make up the remaining total liabilities and capital. The original Federal Reserve Act did not provide for open-market operations. However, to main- tain stability in the money supply, this policy instrument developed out of Reserve Bank experiences during the early years of Fed operations. Unfortunately, these early efforts were not well coordinated. open-market opera- tions buying and selling of securities by the Federal Reserve to alter the supply of money 0 5 10 15 20 Interest Rates 25 Fed Discount Rate/ Primary Credit Rate Bank Prime Rate 1994 1996 1998 2000 1992 1990 1988 1986 1984 1982 1980 2002 2004 2006 2008 2010 2012 2014 2016 2018 FIGURE 4.3 Fed lending rate versus bank prime rate changes, 1980–2018 4.4 Monetary Policy Functions and Instruments 97 Reserve Banks bought government securities with funds at their disposal to earn money for meeting expenses and to make a profit and pay dividends on the stock held by member banks. All 12 Reserve Banks usually bought and sold the securities in the New York market. At times, their combined sales were so large that they upset the market. Furthermore, the funds used to buy the bonds ended up in New York member banks and enabled them to reduce their borrowing at the Reserve Bank of New York. This made it difficult for the Reserve Bank of New York to maintain effective credit control in its area.

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  Interest Rates, Prices and Liquidity

  Lessons from the Financial Crisis

  • Jagjit S. Chadha, Sean Holly(Authors)
  • 2011(Publication Date)
  • Cambridge University Press

    (Publisher)

  Central bank balance sheets and long-term forward rates 181 Expected future debt and deficit to GDP ratios are five-year-ahead projected debt and deficit to GDP ratios based on data from the Congressional Budget Office (CBO), which is available at an annual frequency from 1980 to 1984, and at a semi-annual frequency from 1985 until August 2009. Regressions also include a proxy for expected trend consumption growth (CBO’s five- year-ahead projections of the growth rate of real GNP or GDP) and a proxy for risk (the dividend yield, which is defined as the dividend component of national income divided by the market value of corporate equity held (directly or indirectly) by households as reported in the Federal Reserve Board’s Flow of Funds data). 10 Total central bank (CB) assets are used to capture the effect of central bank balance sheets. 11,12 Central bank assets are expressed as a ratio to potential nominal GDP. Data are available from 1980 to 2009, monthly. Potential nominal GDP as estimated by the CBO is used rather than nominal GDP, so that variation in the latter is not the source of cyclicality in the scaled central bank balance sheet variable. 13 Over time, the ratio of central bank assets to GDP has been slowly increasing, with some cyclicality (Figure 7.3). The graph also clearly shows that the massive expansion of the Fed’s balance sheet during the recent global financial crisis is unprecedented in history, both in absolute terms and relative to GDP. Central bank assets tripled from around $800 billion pre-crisis to more than $2.3 trillion in March 2009 (Figure 7.4). To capture the historical relationship between long-term forward rates and central bank variables, the sample is restricted to the pre-crisis period (1980H1–2007H2).

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  eBook - ePub

  The Structural Foundations of Monetary Policy

  • Michael D. Bordo, John H. Cochrane, Amit Seru, Michael D. Bordo, John H. Cochrane, Amit Seru(Authors)
  • 2018(Publication Date)
  • Hoover Institution Press

    (Publisher)

  For payments of principal that the Federal Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month. For payments of principal that the Federal Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month. The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively. Gradually reducing the Federal Reserve’s securities holdings will result in a declining supply of reserve balances.

  A Balance Sheet for the Future

  While a statement that the supply of reserve balances will decline by set amounts reduces uncertainty and lowers the chances of market disruption, there is still a great deal of uncertainty about what kind of balance sheet the Fed is aiming for. As stated in the Addendum, the “Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system’s demand for reserve balances and the Committee’s decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization.”

  The Fed could be more specific about the eventual size and configuration of the balance sheet, as the range of uncertainty is still very large. There are different views about this, as explained by Powell (2017). One approach is for the Fed to say it is aiming for an eventual balance sheet and level of reserve balances in which the interest rate is determined by the demand and supply of reserves—in other words, by market forces—rather than by an administered rate under IOER. Conceptually this means the Fed would be operating under a framework with a balance sheet, as it did in the years before the crisis—for example, around 2006 and in the decades before. Most likely the level of reserve balances will be greater than the $14 billion observed in 2006 and will depend on liquidity regulations, but the defining concept of a market-determined interest rate is what is important.

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