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The Evolving Role of the Fed’s Balance Sheet: Effects and Challenges

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  • Chaitri Gulati
  • Andrew Lee Smith

Abstract

In this article, Chaitri Gulati and A. Lee Smith present evidence that the Federal Reserve’s expanded balance sheet, with a large portfolio of long-duration assets, has provided a significant amount of policy accommodation in recent years, depressing long-term interest rates by about 1.6 percentage points as of early 2022. They also argue that the FOMC’s plan to remove this accommodation through the passive runoff of maturing securities may prove challenging. They project that the downward pressure the balance sheet is currently placing on longer-term interest rates will only gradually reverse.

Suggested Citation

  • Chaitri Gulati & Andrew Lee Smith, 2022. "The Evolving Role of the Fed’s Balance Sheet: Effects and Challenges," Economic Review, Federal Reserve Bank of Kansas City, vol. 107(no.4), November.
    • Handle: RePEc:fip:fedker:95118
    DOI: 10.18651/ER/v107n4GulatiSmith
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    References listed on IDEAS

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    1. Stefania D’Amico & William English & David López‐Salido & Edward Nelson, 2012. "The Federal Reserve's Large‐scale Asset Purchase Programmes: Rationale and Effects," Economic Journal, Royal Economic Society, vol. 122(564), pages 415-446, November.
    2. Simon M. Potter, 2016. "Discussion of “Evaluating Monetary Policy Operational Frameworks” by Ulrich Bindseil: remarks at the 2016 Economic Policy Symposium at Jackson Hole, Wyoming," Speech 216, Federal Reserve Bank of New York.
    3. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
    4. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
    5. Edmund Crawley & Etienne Gagnon & James Hebden & James Trevino, 2022. "Substitutability between Balance Sheet Reductions and Policy Rate Hikes: Some Illustrations and a Discussion," FEDS Notes 2022-06-03-2, Board of Governors of the Federal Reserve System (U.S.).
    6. Joseph E. Gagnon, 2016. "Quantitative Easing: An Underappreciated Success," Policy Briefs PB16-4, Peterson Institute for International Economics.
    7. Jordan Rappaport, 2020. "What to Do about Fannie and Freddie: A Primer on Housing Finance Reform," Economic Review, Federal Reserve Bank of Kansas City, vol. 105(no.2), pages 5-29, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    balance sheets; Federal Reserve; Federal Open Market Committee (FOMC); interest rates; monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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