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Economic SYNOPSES short essays and reports on the economic issues of the day 2009 ■ Number 13 Federal Reserve Assets: Understanding the Pieces of the Pie Charles S. Gascon, Senior Research Associate ince September 2007, the Federal Reserve has inter“One way to examine the composition vened repeatedly and in various ways to ease credit of assets on the Fed’s balance sheet is to conditions in financial markets. The Federal Open group them according to the objectives Market Committee (FOMC) aggressively reduced the federal funds rate target from 5.25 percent to the current range of the programs used to acquire them.” of 0 to 0.25 percent. As financial conditions deteriorated, The second set of assets falls under the broad category the Fed established numerous programs (which make use of rescue operations.6 Following the failure of Bear Stearns of the asset side of its balance sheet) to increase the flow of 1 in March 2008, the Federal Reserve Board invoked section credit to households and businesses. Chairman Bernanke 13(3) of the Federal Reserve Act, which allows the Fed to described this approach as credit easing.2 extend credit through discounts in “unusual and exigent The Fed’s numerous new programs are not easily sumcircumstances” when a borrower is “unable to secure ademarized by a single number, such as the size of the monequate credit accommodations from other banking institutary base. The programs involve purchasing assets of varytions.” These include special purpose vehicles to handle ing types and maturities; moreover, the size of some proassets from Bear Stearns and AIG.7 Unlike many of the grams will naturally decline as market conditions improve. short-term assets under the first group of lending programs, It therefore becomes important to track not only the size of the Fed’s balance sheet, but also the composition of its assets. One way to examine the composition of 1. Composition of Federal Reserve Assets (Week ending Wednesday) assets on the Fed’s balance sheet is to group $ Billions them according to the objectives of the pro3,000 Short-Term Lending to Financial Firms and Markets grams used to acquire them. The first set of Rescue Operations aim to provide short-term liquidprograms Operations Focused on Longer-Term Credit Conditions 3 ity to financial firms and markets. The 2,500 Traditional Portfolio largest of these programs, at $413 billion, Traditional Porfolio and Long-Term Assets is the Term Auction Facility (TAF), which 2,000 allows depository institutions to borrow from the Fed for 28 or 84 days against a wide variety of collateral.4 At $390 billion, 1,500 currency swap lines are the second largest program. These facilities allow the 14 participating foreign central banks to acquire 1,000 U.S. dollars to lend to their constituents. In exchange, the Fed receives holdings in 500 foreign currencies.5 Combined, these lending programs are designed to ensure that markets have adequate short-term dollar 0 funding. These programs will dissipate as 01/03/07 04/03/07 07/03/07 10/03/07 01/03/08 04/03/08 07/03/08 10/03/08 01/03/09 market conditions improve. S Economic SYNOPSES Federal Reserve Bank of St. Louis 2 these assets may remain on the 2. Federal Reserve Assets Week Ending 03/04/2009 Fed’s balance sheet for some time. Finally, in January 2009, the Fed Rescue Operations $114 Billion began purchasing agency mort6% gage-backed securities and debt Traditional Portfolio $493 Billion from Fannie Mae and Freddie Mac. 26% These efforts are directed at easing longer-term credit conditions.8 Although these programs account for slightly less than 6 percent of the Fed’s current balance sheet, future additions to these programs could add another $500 billion. Chart 1 displays changes in the Short-Term Lending to Operations Focused on LongerFinancial Firms and Markets Term Credit Conditions total size and composition of the $1,189 Billion $107 Billion assets since January 2007. Chart 2 63% 6% provides additional detail on the composition of the assets as of Total Assets: $1,903 Billion NOTE: Components may not sum to totals because of rounding. March 4, 2009. The additional SOURCE: Federal Reserve Board H.4.1 Tables 1 and 8. category in these charts, labeled Traditional Portfolio, includes the 1 See www.stlouisfed.org/timeline/ for a chronology and description of these traditional assets the Fed holds on its balance sheet. programs. Usually, more than 95 percent of this portfolio is Treasury 2 See Ben Bernanke’s “The Crisis and Policy Response,” Stamp Lecture, London securities held outright.9 The black line in chart 1 provides School of Economics, London, England, January 13, 2009. a measure of the Fed’s balance sheet minus the assets from 3 The assets included are term auction credit, central bank liquidity swaps, net the short-term lending programs. portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio holdNotice that, until September 2008, total assets remained ings of LLCs through the Money Market Investor Funding Facility, repurchase agreements, other assets, and other loans (less loans to AIG). slightly under $1,000 billion, because the Fed reduced its 4 See David Wheelock’s “Another Window: The Term Auction Facility,” Economic supply of Treasury securities to offset new lending programs. Synopses, 2008, Number 6; and Craig Aubuchon’s “The Fed’s Response to the Beginning in September, the Fed continued to lend, but Credit Crunch,” Economic Synopses, 2009, Number 6. stopped offsetting the acquisition of new assets with the 5 The loans made to foreign central banks are booked as assets on the Fed’s balance accompanying sale of Treasuries: Total assets doubled. sheet, not the foreign currency. 6 The assets included are credit extended to AIG and net portfolio holdings of As an alternative to the Fed reducing its holdings of Maiden Lane LLC I, II, and III. Treasuries, the Treasury agreed to hold a large volume of 7 Special purpose vehicles are legal entities (i.e., LLCs) created by the Fed to fulfill deposits at the Fed. The deposits by the Treasury offset the narrow or temporary objectives. creation of new base money, as the reserves created by new 8 The assets included are federal agency obligations held outright and mortgageprograms are placed in the Treasury’s account at the Fed. backed securities. The black line in Chart 1 indicates that the total assets, 9 Assets also included are gold certificate account, SDRs certificate account, coin, net the short-term portion, has actually declined since items in process of collection, and assets on bank premises. 2007. According to Chart 2, the sum of these assets comprise 38 percent of the total, or $714 billion. Tracking the composition of Fed assets, as well as the total size of the balance sheet, provides a more comprehensive summary of the current stance of Fed policy during this time of credit easing. ■ Posted on March 10, 2009 Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org