The Wilder View

The Fed: shifting focus

On the surface, the Fed’s balance sheet indicates that the Fed has slowed down; total reserve bank credit extended in the week ending November 6, 2008 topped $2 trillion, and in the week ending June 17, 2009, it rested just under $2.1 trillion. However, the Fed is only shifting its focus from a liquidity policy (buffering bank reserves directly) to an asset purchase policy (quantitative easing). The balance sheet is expected to grow further.


The chart illustrates reserve bank credit by type since the beginning of the year. All of this information can be found using the Fed’s weekly H.4.1 statement, Table 1. Notice how total reserve bank credit has stabilized at the $2 trillion mark. However, the composition of the portfolio is in flux – transitioning toward “securities held outright”, including mortgage-backed securities (MBS) and direct Treasury obligations and away from direct lending (TAF, Repos, discount window).

In the week ending June 18, 2009, the Fed held the following securities on balance:

  • $566.9 billion in Treasury notes and bonds, up $154.5 billion since last year
  • $87.8 billion in agency bonds (Fannie Mae and Freddie Mac), up $87.8 billion since last year.
  • $455.3 billion in agency MBS, up $455.3 billion since last year.

The Fed has appropriated (does the Fed really need to “appropriate” printed money?) $1.25 billion to purchase agency MBS, $200 billion for agency bonds, and $300 billion for Treasuries. Compared to what has settled on balance, the Fed has promised to buy up to another $1.05 trillion more in MBS ($794.7 billion) agency bonds ($112.2 billion) and Treasuries ($145.5 billion). And that does not include the $1 trillion coming through the Term Asset Backed Securities Loan Facility (TALF), which has only just begun, lending $25.2 billion to date.

The Fed is still very much engaged in its quantitative easing policies, and the Federal Reserve Board members probably agree with Alan Blinder. Based on the announced purchase programs to date, the balance sheet could approach $4 trillion by the end of the year (note: it does not have to). If that happens, rates are unlikely to rise next year, as the Fed must unwind its new asset positions first!

Originally published at News N Economics and reproduced here with the author’s permission.

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