The Fed's Balance Sheet

Friday, May 21, 2010
The Wall Street Journal has created a good graphic illustration displaying the development of the Fed's balance sheet during the financial crisis. Assets on the balance sheet are currently $2.333 trillion, of which the main part consists of mortgage-backed securities, Fannie and Freddie debt and government securities. Some noteworthy developments: During the first phase of the financial crisis--when it was still labeled the credit crunch--the Fed's policy of "credit easing" led to profound changes in the composition of its balance sheet, but not its size. It sold government securities to engage in extensive bank lending (through its discount window and through a newly established lending facility called the Term Auction Facility--TAF). During the second phase of the financial crisis--commencing in September of 2008 around the time of the collapse of Lehman Brothers--the Fed initiated a number of programs that led to a rapid expansion of its balance sheet (in addition to a rapid growth in the TAF program). Most important among these were dollar swaps with other central banks, and programs to aid the commercial paper market (which dried up) and mutual money market funds (which experienced a run). During the third phase of the crisis--after the stormfull events of September and October 2008--the Fed initiated its program to push down mortgage rates and prop up the U.S. mortgage markets. Thus it started to buy Fannie Mae and Freddie Mac guaranteed mortgage-backed securities, Fannie and Freddie debt and longer-term U.S. government securities. The result of these programs were an expansion of the Fed balance sheet by more than a trillion dollars and the concomitant expansion of commercial bank reserves of more than a trillion dollars. As commented upon, these developments have created a huge potential for future inflation, and at some time the Fed needs to start unwinding its bloated balance sheet. What will happen now, during what seems to be the start of the fourth phase of the financial crisis--is still uncertain. WSJ promises to update the chart as often as possible.