Written by: Alex Dryden
- The U.S. Federal Reserve (the Fed) has called a halt to the balance sheet reduction program earlier, and at a higher terminal level, than investors first anticipated.
- Bond purchases grew the assets of the balance sheet; however, it is liabilities that are constraining the Fed’s normalization plan.
- Going forward, the balance sheet will likely be used as a monetary policy tool. Furthermore, growth in liabilities should increase the Fed’s balance sheet even if no further quantitative easing (QE) is adopted.
Growing the balance sheet
Before looking at the future of the Fed’s balance sheet, it may be helpful to understand how it became such a major monetary policy tool.
Prior to the 2008 financial crisis, the balance sheet was not used as a tool by the Fed, who preferred to target the fed funds rate. However, in the midst of the financial crisis, the Fed launched the first round of QE (QE1), in addition to cutting the fed funds rate, in order to unfreeze credit markets, which had become paralyzed after the collapse of Lehman Brothers. QE1 was followed by QE2 in November 2010 and QE3 in September 2012 as the Fed looked to stimulate economic growth by driving down bond yields.
It should be noted that Fed asset purchases benefited the federal government. Through balance sheet expansion the Fed drove down bond yields, lowering borrowing costs for the Treasury. More importantly and less discussed is that the government bonds purchased by the Fed were in effect an interest-free loan to the Treasury, as all coupon payments received by the Fed are returned to the Treasury.
Overall, from September 2008 to June 2015, the balance sheet rose from $900 billion to $4.5 trillion. The Fed then kept the balance sheet at approximately $4.5 trillion from June 2015 to October 2017 by reinvesting any maturing debt, as seen in Exhibit 1. The asset purchases turned the balance sheet into a key monetary policy tool.
Geothermal: The Under-Appreciated Investment Opportunity in Alternative Energy
Seeking to Understand the Emerging Gen Z Market?
The Future of Education
How to Influence Others to See Your Value
Secret Revealed: How VR Can Change Student’s Everyday Life
Why You Need to Fail Often … to Succeed More
The Pros and Cons of a ROWE Work Environment
How Hard Seltzer is Changing the Malt Beverage Industry
5 Unexpected Ways to Bond With an Employee
Embrace Roth to Plan for a Tax-Free Retirement
Insights9 hours ago
The Future of Education
Equities18 hours ago
Could Trump Really Win the 2020 Election?
Behavioral Intelligence18 hours ago
Advisors: Are You Asking the Tough Questions?
Development1 day ago
Will the Rumored Merrill Retention Package Materialize?
Research2 days ago
“Follow the Money” Is Always a Good Investing Strategy
Advisor Marketing2 days ago
Everything Advisors Need to Know About Google Reviews
Building Smarter Portfolios2 days ago
Getting True Passive International Exposure
Development3 days ago
How Do You Know Your Financial Advice Is Suitable?