The Federal Reserve balance sheet

The Federal Reserve’s policy actions affect the size and composition of its balance sheet and play a critical role in financial markets. These effects are most evident during periods of financial stress, when the Fed’s actions can help to restore order to financial markets and provide support for the economy. However, even in more ordinary times, the Fed’s asset holdings and its administered rates affect how financial markets operate and strongly influence the financial conditions experienced by all household and firms in the United States and globally. In general, the evolution of the Fed’s balance sheet is driven by the policy objectives of the Fed, the economic and financial shocks to which the Fed must respond, and the legal constraints on Fed activities. These objectives, shocks, and constraints have changed over time, leading to significant variation in the structure and management of the Fed’s balance sheet and its effects on financial markets. We emphasize that the Fed should manage its balance sheet in a flexible manner so that it can be used to address the changing factors affecting the economy and financial markets over time.