One way to examine the composition of assets on the Fed's balance sheet is to group them according to the objectives of the programs used to acquire them.Government securities ; Fiscal policy

Charles S. Gascon

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 ￿ Number 13
S
ince September 2007, the Federal Reserve has inter-
vened repeatedly and in various ways to ease credit
conditions in financial markets. The Federal Open
Market Committee (FOMC) aggressively reduced the fed-
eral funds rate target from 5.25 percent to the current range
of 0 to 0.25 percent. As financial conditions deteriorated,
the Fed established numerous programs (which make use
of the asset side of its balance sheet) to increase the flow of
credit to households and businesses.1 Chairman Bernanke
described this approach as credit easing.2
The Fed’s numerous new programs are not easily sum-
marized by a single number, such as the size of the mone-
tary base. The programs involve purchasing assets of vary-
ing types and maturities; moreover, the size of some pro-
grams will naturally decline as market conditions improve.
It therefore becomes important to track not only the size
of the Fed’s balance sheet, but also the
composition of its assets.
One way to examine the composition of
assets on the Fed’s balance sheet is to group
them according to the objectives of the pro-
grams used to acquire them. The first set of
programs aim to provide short-term liquid-
ity to financial firms and markets.3 The
largest of these programs, at $413 billion,
is the Term Auction Facility (TAF), which
allows depository institutions to borrow
from the Fed for 28 or 84 days against a
wide variety of collateral.4 At $390 billion,
currency swap lines are the second largest
program. These facilities allow the 14 par-
ticipating foreign central banks to acquire
U.S. dollars to lend to their constituents.
In exchange, the Fed receives holdings in
foreign currencies.5 Combined, these lend-
ing programs are designed to ensure that
markets have adequate short-term dollar
funding. These programs will dissipate as
market conditions improve.
The second set of assets falls under the broad category
of rescue operations.6 Following the failure of Bear Stearns
in March 2008, the Federal Reserve Board invoked section
13(3) of the Federal Reserve Act, which allows the Fed to
extend credit through discounts in “unusual and exigent
circumstances” when a borrower is “unable to secure ade-
quate credit accommodations from other banking institu-
tions.” These include special purpose vehicles to handle
assets from Bear Stearns and AIG.7 Unlike many of the
short-term assets under the first group of lending programs,
Federal Reserve Assets: 
Understanding the Pieces of the Pie
Charles S. Gascon, Senior Research Associate
“One way to examine the composition
of assets on the Fed’s balance sheet is to
group them according to the objectives
of the programs used to acquire them.”
1. Composition of Federal Reserve Assets (Week ending Wednesday)
0
500
1,000
1,500
2,000
2,500
3,000
01/03/07 04/03/07 07/03/07 10/03/07 01/03/08 04/03/08 07/03/08 10/03/08 01/03/09
Short-Term Lending to Financial Firms and Markets
Rescue Operations
Operations Focused on Longer-Term Credit Conditions
Traditional Portfolio
Traditional Porfolio and Long-Term Assets
$ Billionsthese assets may remain on the
Fed’s balance sheet for some time.
Finally, in January 2009, the Fed
began purchasing agency mort-
gage-backed securities and debt
from Fannie Mae and Freddie Mac.
These efforts are directed at easing
longer-term credit conditions.8
Although these programs account
for slightly less than 6 percent of
the Fed’s current balance sheet,
future additions to these programs
could add another $500 billion.
Chart 1 displays changes in the
total size and composition of the
assets since January 2007. Chart 2
provides additional detail on the
composition of the assets as of
March 4, 2009. The additional
category in these charts, labeled
Traditional Portfolio, includes the
traditional assets the Fed holds on its balance sheet.
Usually, more than 95 percent of this portfolio is Treasury
securities held outright.9 The black line in chart 1 provides
a measure of the Fed’s balance sheet minus the assets from
the short-term lending programs.
Notice that, until September 2008, total assets remained
slightly under $1,000 billion, because the Fed reduced its
supply of Treasury securities to offset new lending programs.
Beginning in September, the Fed continued to lend, but
stopped offsetting the acquisition of new assets with the
accompanying sale of Treasuries: Total assets doubled.
As an alternative to the Fed reducing its holdings of
Treasuries, the Treasury agreed to hold a large volume of
deposits at the Fed. The deposits by the Treasury offset the
creation of new base money, as the reserves created by new
programs are placed in the Treasury’s account at the Fed.
The black line in Chart 1 indicates that the total assets,
net the short-term portion, has actually declined since
2007. According to Chart 2, the sum of these assets com-
prise 38 percent of the total, or $714 billion. Tracking the
composition of Fed assets, as well as the total size of the
balance sheet, provides a more comprehensive summary
of the current stance of Fed policy during this time of
credit easing. ￿
1 See www.stlouisfed.org/timeline/ for a chronology and description of these
programs.
2 See Ben Bernanke’s “The Crisis and Policy Response,” Stamp Lecture, London
School of Economics, London, England, January 13, 2009.
3 The assets included are term auction credit, central bank liquidity swaps, net
portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio hold-
ings of LLCs through the Money Market Investor Funding Facility, repurchase
agreements, other assets, and other loans (less loans to AIG).
4 See David Wheelock’s “Another Window: The Term Auction Facility,” Economic
Synopses, 2008, Number 6; and Craig  Aubuchon’s “The Fed’s Response to the
Credit Crunch,” Economic Synopses, 2009, Number 6.
5 The loans made to foreign central banks are booked as assets on the Fed’s balance
sheet, not the foreign currency.
6 The assets included are credit extended to AIG and net portfolio holdings of
Maiden Lane LLC I, II, and III.
7 Special purpose vehicles are legal entities (i.e., LLCs) created by the Fed to fulfill
narrow or temporary objectives. 
8 The assets included are federal agency obligations held outright and mortgage-
backed securities.
9 Assets also included are gold certificate account, SDRs certificate account, coin,
items in process of collection, and assets on bank premises.
Economic SYNOPSES Federal Reserve Bank of St. Louis 2
research.stlouisfed.org
2. Federal Reserve Assets Week Ending 03/04/2009
Traditional Portfolio
$493 Billion
26%
Operations Focused on Longer-
Term Credit Conditions
$107 Billion
6%
Short-Term Lending to
Financial Firms and Markets
$1,189 Billion
63% 
Rescue Operations
$114 Billion
6%
NOTE: Components may not sum to totals because of rounding.
SOURCE: Federal Reserve Board H.4.1 Tables 1 and 8.
Total Assets: $1,903 Billion
Posted on March 10, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Federal Reserve assets: understanding the pieces of the pie

http://research.stlouisfed.org/publications/es/09/ES0913.pdf

Federal Reserve assets: understanding the pieces of the pie

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