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1 1 (June 28, 2022)

handle is hein.crs/govehxm0001 and id is 1 raw text is: Congress 0 June 28, 2022 The Federal Reserve's Balance Sheet and Quantitative Easing The Federal Reserve (Fed) has a balance sheet whose size and composition is a product ofits monetary policy and lender-of-last-resort decisions. As discussed below, the Fed has responded to crises by increasing its balance sheet, which is now 10 times larger than it was before the 2008 financial cris is. As part of its efforts to tighten monetary policy, the Fed began to reduce the size of its balance sheet in June 2022. For background, see CRS In Focus IF10054, Introduction to Financial Services: The Federal Reserve, by Marc Labonte; and CRS In Focus IF11751, Introduction to U.S. Economy: Monetary Policy, by Marc Labonte. Balance Sheet Prier The Fed's balance sheet canbe describedin standard accounting terms. Its assets are equalin value to its liabilities and capital, as shown in Table 1. Its net income (i.e., the difference between income and expenses) is comparable to a private company's profits. Table 1. Simplified Federal Reserve Balance Sheet June 15, 2022, Trillions of $ Liabilities and Assets Capital Treasury Securities $5.8 Currency $2.2 MBS $2.7 Bank Reserves $3.2 Loans/Emergency <$0.1 TGA $0.8 Facilities Repos $0 Reverse Repos $2.4 Liquidity Swaps <$0.1 Other $0.3 Other $0.3 Total Liabilities $8.9 Paid-In Capital <$0.1 Surplus <$0.1 Total $8.9 Total $8.9 Source: CRS calculations based on Federal Reserve data. Note: Total for emergen cy facilities include Treasury investments. Assets Most assets on the Fed's balance sheetare financial securities. The Fed is permittedby law to buy or sell a narrowrange of securities andmust do so on the open market (referred to as open market operations). In practice, it purchases mainly Treasury securities and mortgage-backedsecurities (MBS) that are guaranteed by a federal agency or a government-sponsored enterprise (GSE). The open market requirement means that the Fed trans acts with primary dealers, a group of large broker- dealers activein Treasury markets, and cannotpurchase Treasury securities directly fromthe U.S. Treasury. When the Fed purchases securities fromprimary dealers, it increases bankreserves (discussed below), increasing the overall liquidity of the financial system. The Fed can also provide primary dealers and foreign centralbanks with temporary liquidity through repurchase agreements (repos). In a repo, the Fed temporarily purchases a Treasury secuiy or MBS with an agreement to reverse the sale in the near future. (For more information, see CRS In Focus IF11383, Repurchase Agreements (Repos): A Primer, by Marc Labonte.) In 2021, the Fed committed to making repo lending permanently available on demand by creating its Standing Repurchase Agreement Facility. In crises, the Fed lends to banks through its discount window and creates emergency programs to stabilize financial markets. Through these programs, it makes or acquires loans and acquires private securities that are also assets on its balance sheet. These assets swell during crises and then shrinkrelatively quickly as financial conditions normalize. The Fed also lends dollars to foreign central banks in crises through foreign currency svwaps. Just as the Fed increases market liquidity through repos, it can reduce liquidity through rewrse repos, in which the Fed temporarily sells securities to market participants and foreign centralbanks in exchange for cash. In 2014, the Fed institutionalized reverse repos by creating the Overnight Reverse Repurchase Agreement Facility. The Fed pays market participants an interestrate on reverse repos, which helps the Fed maintain its monetary policy rate targets. Banks hold reserves in accounts at the Fed to make and receive payments fromotherbanks. These bank reserves are liabilities to the Fed. Similar to reverse repos, the Fed pays banks intereston reserves that helps the Fed maintain its interest rate targets. Mechanically, when the Fed purchases a security or makes a loan, it finances it by creating new bankreserves. As aresult, the asset and liability sides of the balance sheet increaseby an identical amount so that assets always equal liabilities plus capital. The U.S. Treasury also holds its cashbalances at the Fed in the Treasury General Account (TGA). When the Treasury receives revenue, its balance increases, and when it makes payments, its balance decreases. The Fed issues p aper currency, officially called Federal Reserve notes and commonly called cash. A Federal Reserve note is an IOU from the Fed to its bearer that pays no interest. As such, it is a liability on the Fed's balance sheet. Capital The Fed's capitalis equalin value to the difference betCen its assets and liab ilities. It takes two forms. Firs t, private

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