The Fed's Balance Sheet

Key Takeaways

• FED’s Main Purpose: maximizing employment while minimizing inflation. The FED also plays a role in financial stability via quantitative easing and tightening via sale of securities and it ensures there is sufficient disposable cash circulating through the economy and sufficient stability to finance critical loans whilst being able to return demand deposits.
• Interest rates: the Federal Funds Rate is the rate established by the federal reserve (FED) at which banks lend each other excess reserves overnight, and that determines the rate at which banks lend money and pay interest on deposits. For banks to be profitable, they must earn more than and pay less than to customers compared to the money they pay in the Fed funds rate.
• Quick Look – Fed Balance Sheet: Assets on the Fed balance sheet contains securities (such as mortgage backed securities) bought from banks and private investors, bonds, repurchase agreements (repos), loans, foreign currency assets, and any physical assets, while the liabilities include all existing reserves, currency in circulation, reverse repurchase agreements (reverse repos), and everything on the US Treasury general account.
• Recent Trends: Reserves, repo, and currency in circulation have skyrocketed over the past few years, and no one really knows why. Economists predict it is because the FED fears a looming recession, but at the same time it could be for extraneous reasons the FED is not super transparent about. Additionally, the large amounts of currency in circulation are not even held by American consumers and businesses, but instead abroad, of which a large portion has been flushed into criminal networks and the black market.