DEFINITION of Fed Balance Sheet
The Fed balance sheet is a breakdown of the assets and liabilities held by the Federal Reserve. This report 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 and is formally known as the Factors Affecting Reserve Balances Report.
BREAKING DOWN Fed Balance Sheet
For much of financial history, the Fed's balance sheet was a sleepy topic. 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.
Quantitative easing (QE) was an unconventional monetary policy in which a central bank purchased 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 efforts certainly helped ease bank's liquidity issues, critics contend QE was a giant drawback was the 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.
The Brookings Institute's Hutchins Center sums up the Fed's balance sheet best: Like any entity, the Federal Reserve has liabilities (mainly money that commercial banks have deposited at the Fed plus outstanding currency) and assets (mainly U.S. Treasury debt and mortgage-backed securities.) What makes the Fed unique is that it can expand its balance sheet at will by (electronically) printing money (technically, bank reserves) and using that money to buy Treasuries in the open market. If you're extra curious, you can always view balance sheet details here.