Federal reserve balance sheet

Federal reserve balance sheet

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Menu IconA vertical stack of three evenly spaced horizontal lines. 5 trillion in Treasurys and other assets, like mortgage-backed securities, on its balance sheet. Since then, when these assets have come due the Fed has turned around and reinvested the principal back into new assets, maintaining the size of its balance sheet. The basic idea is that the Fed will stop reinvesting the principal of securities when they mature.

Put another way, when a 10-year Treasury on the Fed’s books comes due, the money it gets back from that investment will not be used to go out and buy another Treasury. The slowing of reinvestment will be phased in over time. 6 billion in principal returned a month. The Fed said it would ultimately have a balance sheet “appreciably below that seen in recent years but larger than before the financial crisis” in part because the Fed expects banks to maintain higher demand for reserves supplied by the central bank. All participants agreed to augment the Committee’s Policy Normalization Principles and Plans by providing the following additional details regarding the approach the FOMC intends to use to reduce the Federal Reserve’s holdings of Treasury and agency securities once normalization of the level of the federal funds rate is well under way. The Committee intends to gradually reduce the Federal Reserve’s securities holdings by decreasing its reinvestment of the principal payments it receives from securities held in the System Open Market Account. Specifically, such payments will be reinvested only to the extent that they exceed gradually rising caps.

The Committee also anticipates that the caps will remain in place once they reach their respective maximums so that the Federal Reserve’s securities holdings will continue to decline in a gradual and predictable manner until the Committee judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively. Gradually reducing the Federal Reserve’s securities holdings will result in a declining supply of reserve balances. The Committee affirms that changing the target range for the federal funds rate is its primary means of adjusting the stance of monetary policy. However, the Committee would be prepared to resume reinvestment of principal payments received on securities held by the Federal Reserve if a material deterioration in the economic outlook were to warrant a sizable reduction in the Committee’s target for the federal funds rate. Why do Americans cling to their European heritage? Join over 300,000 Finance professionals who already subscribe to the FT.

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