The Fed's Balance Sheet

Posted: Aug 21, 2019 9:40 AM

How big is the U.S. Federal Reserve's balance sheet? What kind of assets does it hold? What is the value of those assets?

Three questions, the answers for which we've presented in the following two charts! In the first chart below, we show the value of the major asset categories the U.S. Federal Reserve has held on its balance sheet in each week from 18 December 2002 through 14 August 2019, which provides the data needed to answer all three questions.

Our second chart presents the same data, but this time in a stacked area format, which makes it easier to find the answer to the first question of how big the Fed's balance sheet has been from 18 December 2002 through 14 August 2019.

Starting at 18 December 2002, the Fed's balance sheet consisted mainly of U.S. Treasuries, which grew from $629 billion at that time to roughly $800 billion in late 2007. The onset of the Great Recession saw the Fed's balance sheet crash to a level of roughly $450 billion by mid-2008, after which the size of the Fed's balance sheet inflated in three major phases through its quantitative easing monetary policy, in which it sought to prop up government supported agencies such as Fannie Mae and Freddie Mac by buying bonds these entities issued to support their operations (Federal Agency Debt), while also buying up the Mortgage Backed Securities these institutions issued to prop up the U.S. housing market. At the same time, the Fed also funded the U.S. government's deficit spending by buying copious amounts of U.S. Treasuries.

By January 2015, the combined amount of all these assets averaged roughly $4.25 trillion, which the Fed held stable at this level until late 2017, when the Fed began actively reducing the amount of its balance sheet holdings through its quantitative tightening monetary policy. Through 14 August 2019, the combined total of these three major asset categories fell to $3.6 trillion, $625 billion less than the average level it held from 2015 through most of 2017.

If we use Morgan Stanley's estimate that each $200 billion reduction in the Fed's balance sheet has the equivalent effect of a 0.25% hike in the Federal Funds Rate, the Fed's active balance sheet reduction quantitative tightening program since late 2017 has had the equivalent effect of increasing the Federal Funds Rate by an additional 0.8% over its official target range of 2.25-2.50% through the end of July 2019.

On 31 July 2019, the Fed acted to cut its target range for the Federal Funds Rate by a quarter percentage point and to suspend its balance sheet reduction program, effective 1 August 2019.