The Federal Reserve System constitutes the national bank of the United States. The H.4.1 statistical release, “Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,” is published each week and presents a balance sheet for each Federal Reserve Bank, a consolidated balance sheet for all 12 Reserve Banks, an associated statement that lists the factors affecting reserve balances of depository institutions, and several other tables presenting information on the assets, liabilities, and commitments of the Federal Reserve Banks. Changes in the Federal Reserve’s balance sheet can be used to understand more clearly important details concerning the implementation of monetary policy. Over recent years, the development and implementation of a number of new lending facilities to address the financial crisis have both increased complexity of the Federal Reserve’s balance sheet and has led to increased public interest in it.As of the end of May 2013, the Federal Reserve held $3.4 trillion in assets, up over $500 billion from the prior year. Much of this growth is due to the various Quantitative Easing programs that the Bernanke Fed has enacted to keep interest rates low by printing dollars and purchasing an almost unlimited amount of commercial and government debt. Currently, the Fed holds nearly $1.9 trillion in Treasury securities (the traditional debt that the Federal Reserve uses to control the money supply), but also $1.2 trillion in mortgage backed securities, along with significant amounts of AIG stock, TARP debt, and other financial assets.
The growth in the money supply through the purchase of commercial debt has been a novel approach used by the Federal Reserve to both force down interest rates and to recapitalize the financial system. It is part of a general Keynesian approach to try to boost the economy by dumping money into the system. It has not, however, had much success, and the continued rapid growth in the balance sheet – in essence nationalized debt – has not boosted the economy to a great extent. At some point, the Federal Reserve will need to deleverage and will do this by rapidly boosting interest rates in order to pull back the dollars that it produced, or will simply have to write off much of the debt, in effect defaulting on the taxpayer.
Interest in the Federal Reserve has intensified and the organization has been highly politicized since the financial crisis. Continued financial stability (both in terms of interest rates and inflation) relies on the successful deleveraging of the rapidly growing balance sheet. We will continue to monitor this closely and will keep track of these data in future releases.