Understanding the Fed's Balance Sheet: A Basic Guide ( Fed Balance Sheet 101) Fed's Balance Sheet 101 What Does It Tell Us About Our Financial Future? Explore how the Fed's holdings influence economy
Really interesting. Great to see the Fed’s balance sheet. Interesting to see that almost all Fed assets are securities (treasuries and MBS) and liabilities are either currency (Fed notes are mostly $100 bills as well as smaller ones) or deposits from banks. Reverse repo and the treasury’s account are about 15% of total. Best to think of those as just non-bank deposits.
Couple of questions/comments: I’d de-emphasize “reserves” since banks no longer have reserve requirements and earn interest on all of their Fed balances. It’s probably best to just think of those as deposits that banks hold at the Fed. Most importantly, understanding the Fed B/S means you need to understand their bank depositors too.
Most banks hold about 20% of their assets in cash and securities, so when their deposits at the Fed go up (what you call “reserves”) it is most likely that those funds either come from 1) selling securities or 2) increases in deposits from customers. If #1, the Fed’s QE is little more than treasuries and MBS migrating from bank portfolios to the Fed portfolio. For example, $1T in QE means banks in aggregate sell $1T in MBS and put that $1T in their Fed account; meanwhile, the Fed uses that new $1T deposit from banks to buy $1T in MBS. It’s reasonable to wonder whether that trade is all that meaningful.
If #2, bank customers shift investments from term fixed income (like MBS funds) to bank deposits. Those bank deposits (a liability of the banks) must be invested somewhere, and many banks would use them to increase their balances in their Fed account. That is, both liabilities and assets of the banks would rise. As with #1, the Fed uses those deposits from banks to buy securities. In aggregate, these will be the same securities the bank customers sold in order to have extra funds to deposit.
Really interesting. Great to see the Fed’s balance sheet. Interesting to see that almost all Fed assets are securities (treasuries and MBS) and liabilities are either currency (Fed notes are mostly $100 bills as well as smaller ones) or deposits from banks. Reverse repo and the treasury’s account are about 15% of total. Best to think of those as just non-bank deposits.
Couple of questions/comments: I’d de-emphasize “reserves” since banks no longer have reserve requirements and earn interest on all of their Fed balances. It’s probably best to just think of those as deposits that banks hold at the Fed. Most importantly, understanding the Fed B/S means you need to understand their bank depositors too.
Most banks hold about 20% of their assets in cash and securities, so when their deposits at the Fed go up (what you call “reserves”) it is most likely that those funds either come from 1) selling securities or 2) increases in deposits from customers. If #1, the Fed’s QE is little more than treasuries and MBS migrating from bank portfolios to the Fed portfolio. For example, $1T in QE means banks in aggregate sell $1T in MBS and put that $1T in their Fed account; meanwhile, the Fed uses that new $1T deposit from banks to buy $1T in MBS. It’s reasonable to wonder whether that trade is all that meaningful.
If #2, bank customers shift investments from term fixed income (like MBS funds) to bank deposits. Those bank deposits (a liability of the banks) must be invested somewhere, and many banks would use them to increase their balances in their Fed account. That is, both liabilities and assets of the banks would rise. As with #1, the Fed uses those deposits from banks to buy securities. In aggregate, these will be the same securities the bank customers sold in order to have extra funds to deposit.
Oops. Reverse repo plus treasury is 23% not 15%. Still tail, not dog.