Describe the Fed balance sheet.
The Federal Reserve System’s assets and liabilities are shown on the Fed balance sheet. The Fed releases information on its balance sheet every week in a report titled “Factors Affecting Reserve Balances.”
What the Fed Balance Sheet Means
Congress established the Fed in 1913 to stabilize the nation’s financial and banking institutions during crises.
For a long time, the Fed’s balance sheet was dull. Every Thursday, the Federal Reserve’s weekly balance sheet report tallies assets and liabilities by category, like a company balance sheet, offering a consolidated account of all 12 regional Federal Reserve Banks’ conditions.
The Fed owns mainly government securities and bank credit. U.S. currency and Fed-deposited bank and Treasury reserve balances are its obligations.
The weekly balance sheet report became more relevant as a financial and economic indicator during the 2008 financial crisis when the Fed began quantitative easing. Analysts learned more about Fed market activities from the balance sheet. Analysts might track asset acquisitions.
Fed Balance Sheet and QE
QE is when a central bank buys vast government bonds or other assets on the open market to lower long-term interest rates and imply lax monetary policy.
The Fed and other central banks have utilized quantitative easing, or large-scale asset purchases, to boost economic growth beyond zero interest rates.
Despite political criticism, the European Central Bank, Bank of Japan, and Fed have successfully implemented the approach to address economic and financial crises.
Special Considerations
The Fed’s balance sheet resembles a corporation’s, except central banks have infinite cash. The Fed and other central banks exist to maintain economic and financial stability, not profit.
As in Monopoly, the Fed aims to issue enough money to keep the game going, not to win. The Fed should have enough assets to fulfill its mission.
Conclusion
- Federal Reserve assets and liabilities are listed on the balance sheet.
- The Fed reports its assets and liabilities weekly.
- The Fed’s balance sheet has increased considerably since 2008 to sustain the economy after the global financial crisis and the COVID-19 epidemic.
