The Federal Reserve's Balance Sheet: A Primer and Projections

40 Pages Posted: 26 Dec 2012

See all articles by Seth B. Carpenter

Seth B. Carpenter

Board of Governors of the Federal Reserve System

Jane E. Ihrig

Board of Governors of the Federal Reserve System

Elizabeth Klee

Board of Governors of the Federal Reserve System

Alexander Boote

Board of Governors of the Federal Reserve System

Daniel Quinn

Federal Reserve Board - Department of Monetary Affairs

Date Written: July 7, 2012

Abstract

Over the past few years, the Federal Reserve's use of unconventional monetary policy tools has led it to hold a large portfolio of securities. The securities holdings in excess of historical norms have been shown to be putting downward pressure on longer-term interest rates. One question asked is how long this unusual amount of monetary policy accommodation will be in place. Here we provide projections of the evolution of the Federal Reserve's balance sheet that are consistent with public economic forecasts and announced Federal Open Market Committee policy principles to help answer this question. We begin with a primer on the Federal Reserve's balance sheet. Then, with the foundational concepts in place, we present a framework for projecting Federal Reserve assets and liabilities through time. In the projections, the Federal Reserve's balance sheet remains large by historical standards for several years. Our baseline projection suggests that market participants likely do not expect the Federal Reserve's portfolio to return to a more normal size until August 2017, and its composition to return to normal until September 2018. Overall, this suggests that market participants believe that unconventional monetary policy will be in place for some time, likely depressing longer-term interest rates for a number of years.

Keywords: Federal Reserve's balance sheet, unconventional monetary policy, monetary policy implementation

JEL Classification: E52, E58, E47, E61, E02

Suggested Citation

Carpenter, Seth B. and Ihrig, Jane E. and Klee, Elizabeth and Boote, Alexander and Quinn, Daniel, The Federal Reserve's Balance Sheet: A Primer and Projections (July 7, 2012). FEDS Working Paper No. 2012-56, Available at SSRN: https://ssrn.com/abstract=2193900 or http://dx.doi.org/10.2139/ssrn.2193900

Seth B. Carpenter

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2385 (Phone)
202-452-2301 (Fax)

Jane E. Ihrig

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

Elizabeth Klee (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alexander Boote

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Daniel Quinn

Federal Reserve Board - Department of Monetary Affairs

20th and C Streets, NW
Washington, DC 20551
United States

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