An Analysis of the Federal Reserve’s Balance Sheet and Reduction Operations
The severity of the last Great Recession motivated monetary policy makers in the United States and abroad to dig deep into their toolbox to assist their economies in a time of great economic stress. Not only did the Federal Reserve (Fed) lower the fed funds rate to zero, and keep it there for many years, they also increased the size of their balance sheet from $800 billion to $4.5 trillion. By implementing large scale security purchase programs, the Fed anticipated their involvement in the market would lower longer tenor interest rates. The Fed hoped lower longer-term rates would motivate individuals and businesses to take on debt for projects or investments that would stimulate the economy. The Fed’s balance sheet, formally known as Federal Reserve System Open Market Account (SOMA), traditionally held foreign currency reserves and Treasury securities, but as the Fed implemented their plans to help the economy, the balance sheet swelled with agency mortgage backed securities (MBS), agency debentures, and additional Treasury securities.