Fed Balance Sheet Watching : Part I
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Fed Balance Sheet: the Assets Side
The Federal Reserve’s (the Fed) balance sheet has gotten a lot of attention recently. In addition to interest rate targeting via the Federal Funds Rate, the Fed can affect overall financial liquidity through its balance sheet. In this article, we will focus on just the Assets side of the Fed balance sheet and how it leads to easing or tightening financial conditions through adding or subtracting liquidity (next time, in Part 2, we will look at the Liabilities side of the balance sheet).
Note, this article is not a deep dive into the plumbing that underlies Fed financial transactions. Anyone interested in that level of analysis should check out The Fed Guy blog by former Fed trader Joseph Wang or his numerous appearances on the Forward Guidance podcast with Jack Farley. This article is an attempt to visualize and make concrete changes in the asset side of the Fed balance sheet. So we can track the end result of Fed actions.
As an initial, primary source matter, where should we turn to find out about the Fed’s balance sheet? Luckily, the Fed publishes a weekly update about that every Thursday, in Factors Affecting Reserve Balances Table H.4.1 and FRED also publishes that data here. We have a scraper for mining that FRED link for every relevant code but for today we are just lookin at a few time series. Let’s get to it.
The first chart below shows how the Fed’s total assets have grown over time. Along with a marker for various stages of quantitative easing. In 2008, the total level of assets was less than $1 trillion and today it’s around $8.5 trillion.
Buying these assets or adding assets to the balance sheet == easing.
When the Fed buys assets, dollars go into the financial system because the Fed puts dollars into the Deposits account of whatever institution sold those assets.
The next chart shows the same trend in assets, but we have also labeled 4 stages of QE since 2008:
1) GFC – the financial crisis from whence QE originated 2) Treasuries only – when the Fed bought only Treasuries 3) MBS and Treasury – when the Fed expanded to buying mortgage-backed securities
4) COVID – when the Fed undertook emergency QE during the pandemic economic shutdown
As our labels indicate, the growth in assets from less than $1 trillion to over $8.5 trillion has been driven by the purchase of Treasuries and MBS.
As the next chart shows, the Fed had less than $1 trillion dollars of Treasuries on its balance sheet before the Great Financial Crisis and $0 MBS pre-2009. Today it’s close to $5.5 trillion and $2.5 trillion respectively.
We can see a large and steep jump in 2020. Let’s label our QE periods.
Notice how QE 2 was Treasuries only. Then QE 3 and QE 4 involved both Treasuries and MBS. Note only have assets on the balance sheet grown, the mix of those assets has changed over time.
We can see that growth of these assets stops in 2022 and starts to turn negative – meaning the Fed is selling assets == tightening. Our last two chart shows the weekly and monthly changes, since January of 2021, in Fed assets. We have labeled positive changes with green and easing, and negative changes with red and tightening.
That monthly look emphasizes how the Fed has been sticking to its tightening guns since May of 2022.
With monthly assets on the Fed balance sheet shrinking $100 billion in November. That’s all for today Fed data watchers and visualizers! If you liked this content, please connect or follow me on LinkedIn and look out for our macro data science book coming out soon (chock full of R and Python code)! Next time we’ll dive into the world of Fed Liabilities and Reverse Repurchase Agreements.
Written by Jonathan Regenstein
- Executive Director Research and Analytics : Sylvan Road Capital LLC
- Research Affiliate : Georgia Tech Financial Services Innovation Lab
Education
Fed Balance Sheet Watching : Part I
