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The Federal Reserve System Balance Sheet: What Happened and Why it Matters

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  • Mr. Peter Stella

Abstract

The recent expansion of the balance sheet of the consolidated Federal Reserve Banks (FRB) is analyzed in an historical context. The analysis reveals that the nature of Fed involvement in U.S. financial markets has changed dramatically and its expansion is several orders of magnitude beyond what is usually reported. The associated fiscal risks and potential exit strategies are then considered. Although risks are considerable in certain unlikely scenarios, FRB capital, earnings capacity, and reserves are more than ample to preserve their financial independence. Nevertheless, the occurrence of losses or a significant drop in FRB profit might lead to an eventual curtailment of Fed operational independence. The paper concludes by considering options to enhance FRB risk management and to assign responsibilities for monetary, financial stability and fiscal policies once the current crisis is overcome.

Suggested Citation

  • Mr. Peter Stella, 2009. "The Federal Reserve System Balance Sheet: What Happened and Why it Matters," IMF Working Papers 2009/120, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2009/120
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    References listed on IDEAS

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    Cited by:

    1. Donato Masciandaro, 2016. "More than the Human Appendix: Fed Capital and Central Bank Financial Independence," BAFFI CAREFIN Working Papers 1635, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Andrew Filardo & Hans Genberg, 2010. "Monetary Policy Strategies in the Asia and Pacific Region: What Way Forward?," Working Papers id:3139, eSocialSciences.
    3. Bholat, David & Darbyshire, Robin, 2016. "Accounting in central banks," Bank of England working papers 604, Bank of England.
    4. Stephen Quinn & William Roberds, 2016. "Death of a Reserve Currency," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 63-103, December.
    5. Seok Gil Park, 2009. "Quasi-Fiscal Policies of Independent Central Banks and Inflation," CAEPR Working Papers 2009-020, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    6. Bindseil, Ulrich & Winkler, Adalbert, 2012. "Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective," Working Paper Series 1478, European Central Bank.
    7. Tilak Abeysinghe & Ananda Jayawickrama, 2013. "A segmented trend model to assess fiscal sustainability: The US experience 1929–2009," Empirical Economics, Springer, vol. 44(3), pages 1129-1141, June.
    8. Zbigniew Polański & Mikołaj Szadkowski, 2021. "An accounting-based model of seigniorage, and recent monetary developments," Bank i Kredyt, Narodowy Bank Polski, vol. 52(5), pages 391-436.
    9. Ricardo Reis, 2009. "Interpreting the Unconventional U.S. Monetary Policy of 2007-09," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 119-182.
    10. Mr. Mark R. Stone & Mr. Etienne B Yehoue & Kotaro Ishi, 2009. "Unconventional Central Bank Measures for Emerging Economies," IMF Working Papers 2009/226, International Monetary Fund.
    11. Calomiris, Charles W. & Mason, Joseph R. & Wheelock, David C., 2023. "Did doubling reserve requirements cause the 1937–38 recession? New evidence on the impact of reserve requirements on bank reserve demand and lending," Journal of Financial Intermediation, Elsevier, vol. 56(C).
    12. Pikkarainen, Pentti, 2010. "Central bank liquidity during the financial market and economic crisis : observations, thoughts and questions," Research Discussion Papers 20/2010, Bank of Finland.
    13. Pikkarainen, Pentti, 2010. "Central bank liquidity during the financial market and economic crisis: observations, thoughts and questions," Bank of Finland Research Discussion Papers 20/2010, Bank of Finland.
    14. Lixin Sun, 2020. "On the People’s Bank of China’s Financial Strength and Policy Outcomes," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(3), pages 135-161.
    15. repec:zbw:bofrdp:2010_020 is not listed on IDEAS
    16. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    17. Milošević Andriana & Jemović Mirjana, 2017. "Non-Standard Measures of the Monetary Policy – Mechanism for Overcoming Problems in the Implementation of the Neoliberal Concept of Monetary Policy During a Financial Crisis," Economic Themes, Sciendo, vol. 55(4), pages 465-480, December.
    18. Kotaro Ishi & Mr. Kenji Fujita & Mr. Mark R. Stone, 2011. "Should Unconventional Balance Sheet Policies Be Added to the Central Bank toolkit? a Review of the Experience so Far," IMF Working Papers 2011/145, International Monetary Fund.
    19. Schüder, Stefan, 2011. "Monetary policy trade-offs in a portfolio model with endogenous asset supply," MPRA Paper 32019, University Library of Munich, Germany.
    20. Winkler, Adalbert & Bindseil, Ulrich, 2012. "Dual liquidity crises under alternative monetary frameworks," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62032, Verein für Socialpolitik / German Economic Association.
    21. repec:sgm:jbfeuw:v:2:y:2015:i:4:p:14 is not listed on IDEAS
    22. William A. Allen, 2015. "Asset choice in British central banking history, the myth of the safe asset, and bank regulation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(4), pages 18-31, June.
    23. George Selgin, 2014. "Operation Twist-the-Truth: How the Federal Reserve Misrepresents Its History and Performance," Cato Journal, Cato Journal, Cato Institute, vol. 34(2), pages 229-263, Spring/Su.
    24. Schüder, Stefan, 2014. "Expansive monetary policy in a portfolio model with endogenous asset supply," Economic Modelling, Elsevier, vol. 41(C), pages 239-252.
    25. Pohl Rüdiger, 2009. "Krisenbewältigung und Krisenvermeidung: Lehren aus der Finanzkrise / Crisis resolution and future crisis prevention: lessons from the recent financial crisis," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 60(1), pages 289-316, January.

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