FOR EDUCATION ONLY
The Federal Reserve System, the FED, is the central bank of the United States and is responsible for the nation’s monetary policy. The Fed’s primary goals are to (1) promote maximum employment, (2) stable prices, and (3) interest rate management. The Fed helps to create stability in the financial system.
The Fed uses various programs and initiatives that change its balance sheet: assets and liabilities including the money supply within the economy.
- The FED maintains a balance sheet listing its assets and liabilities.
- The FED’s assets include various Treasuries and mortgage-backed securities purchased in the open market and loans made to banks.
- The FED’s liabilities include currency in circulation and bank reserves held at commercial banks.
- During economic crises, the FED can expand its balance sheet by buying more assets, such as bonds—called quantitative easing (QE).
The Fed’s assets comprise Treasury securities and other debt instruments. The Treasury securities include Treasury notes, maturity dates that range from two to 10 years, and Treasury bills, maturities ranging from 4 to 52 weeks.
Mortgage-backed securities comprise a basket of home loans. These fixed-income securities are packaged and sold to investors by banks and financial institutions.
The FED’s liabilities are currency in circulation, like the green dollar bills, and the money lying in the reserve account of member banks and U.S. depository institutions. Dollar bills in the FED are neither assets nor liabilities.
The FED’s liabilities increase or decrease whenever the FED buys or sells its assets.
The FED requires commercial banks to hold on to minimum reserves, assets for commercial banks and reciprocally liabilities for the FED.
The FED expands its balance buying assets, and contracts selling them.
Quantitative Easing is a policy. The FED purchases government securities or other securities from the market to lower interest rates and increase the money supply.
The FED can create inflation increasing the money supply. QE may cause stagflation, inflation without the intended economic growth.
QE can devalue the domestic currency. A devalued currency can help domestic manufacturers because exports are cheaper, but imports are more expensive.