A look inside the Fed’s Balance Sheet

Phil Izzo:

Ahead of the Federal Reserve‘s policy-setting meeting tomorrow and the coming end this month of QE2, it’s worth taking a look at the latest figures from the Fed’s balance sheet.

Assets on the Fed’s balance sheet sit at around $2.811 trillion as of last Wednesday. That’s up from less than $1 trillion prior to the recession. During the recession the Fed expanded its balance sheet through several programs aimed at keeping markets functioning. As markets stabilized the Fed shifted out of emergency programs and into purchases of U.S. Treasurys, mortgage-backed securities and agency debt securities to drive down interest rates and encourage more borrowing and growth in two separate rounds of what is known as quantitative easing.

Though the overall size of the balance sheet is continuing to increase, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings, which were part of the first round of quantitative easing, have steadily declined as loans are paid off or mature. The Fed still holds nearly $1 trillion in MBS and more than $1 trillion in agency debt, but now owns more Treasurys — over $1.5 trillion. As the latest round of bond-buying announced last year ends this month, the size of the balance sheet is likely to stabilize. The Treasurys holdings are likely to continue to rise, as the central bank purchases bonds with money reinvested from its shrinking MBS portfolio. If economic growth accelerates this year, as the Fed hopes, ending the reinvestment of maturing MBS is likely to be the first step toward eventually raising rates and paring down the central bank’s balance sheet.