What Is the Fed Balance Sheet?

The Fed balance sheet is a breakdown of the assets and liabilities held by the Federal Reserve. In the United States, the Federal Reserve is the central bank founded by Congress in 1913 to ensure the stability and safety of the nation's financial and monetary structures. The Fed balance sheet is a report that essentially outlines the factors that affect both the supply and the absorption of Federal Reserve funds. The Fed balance sheet report reveals the means the Fed uses to inject cash into the economy. The report is formally known as the "Factors Affecting Reserve Balances."

Key Takeaways

  • Congress established the Federal Reserve System in 1913 to ensure the stability of the U.S. monetary and financial systems.
  • The Fed balance sheet is a weekly report that lists the Federal Reserve's assets and liabilities.
  • The report outlines what the Fed is doing to expand or contract its balance sheet as it implements its monetary policy.
  • During the 2007-2009 financial crisis, the Fed balance sheet reflected the Fed's use of quantitative easing to lower interest rates and increase the money supply.

Understanding the Fed Balance Sheet

For much of its history, the Fed's balance sheet was a sleepy topic. Issued every Thursday, the weekly balance sheet report (or H.4.1) includes items that might seem at first glance typical of most company balance sheets. It lists all assets and liabilities, providing a consolidated statement of the condition of all 12 regional Federal Reserve Banks.

The Fed's assets consist primarily of government securities and the loans it extends to its regional banks. Its liabilities include U.S. currency in circulation. Other liabilities include money held in the reserve accounts of member banks and U.S. depository institutions.

The weekly balance sheet report became popular in the media during the financial crisis starting in 2007. When launching their quantitative easing in response to the ongoing financial crisis, the Fed balance sheet gave analysts an idea of the scope and scale of Fed market operations at the time. In particular, the Fed balance sheet allowed analysts to see details surrounding the implementation of an expansionary monetary policy used during the 2007-2009 crisis.

The Fed Balance Sheet and Quantitative Easing (QE)

Quantitative easing (QE) is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market to lower interest rates and increase the money supply. Using the Fed's balance sheet through quantitative easing remains somewhat controversial. Although these efforts certainly helped ease bank's liquidity issues during the financial crisis, critics contend QE was a giant drawback and was a distortion of free-market principles. Today, markets are still sorting out the short-term bump but longer-term side effects of the government stepping in.

Special Considerations

What makes the Fed's balance sheet vastly different than corporate balance sheets is the Fed's ability to print money at will. The Fed can almost instantaneously expand its balance sheet by electronically printing money. The Fed can then use this money to buy assets, such as U.S. Treasury notes. Similarly, the Fed can contract its balance sheet by selling its assets. This rapid expansion and contraction of its balance sheet is part of the Fed's monetary policy and can have profound and long-lasting effects on the economy.