FEDERAL RESERVE BANK & MONETARY POLICY
key sources of information on FRB & MONETARY POLICY
The following are links to information on the Federal Reserve's roles and activities relating to monetary policy:
FEDERAL RESERVE - QUANTITATIVE EASING
AND BALANCE SHEET NORMALIZATION ACTIVITY
The Federal Reserve's approach to the implementation of monetary policy has evolved considerably since late 2008 and the financial crisis. From the end of 2008, the Federal Reserve greatly expanded its holding of longer-term securities through open market purchases with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation by making financial conditions more accommodative. There are two primary holdings: agency MBS and U.S. Treasuries.
To add liquidity and to place downward pressure on longer term interest rates, the Fed started purchasing U.S. Treasury securities with the portfolio rising to approximately $2.1 trillion by July 2019.
Commencing August 2019, the Fed commenced a program to (1) continue to reinvest all maturing U.S. Treasury securities currently held and (2) replace all agency MBS run-off with new purchases of U.S. Treasury securities. This will add another $1.6 trillion in U.S. Treasury securities.
The result of these actions will be to have a balance sheet approaching $3.7 trillion and comprised almost entirely of U.S. Treasury securites.
To support the MBS market during the financial crisis, the Fed started purchasing agency MBS with the portfolio peaking at approximately $1.7 trillion.
Commencing August 2019, the Fed concluded all purchase activity and has placed the agency MBS portfolio in run-off mode.
Statement Regarding Reinvestment in Treasury Securities and Agency Mortgage-Backed Securities (JULY 31, 2019)
Effective August 1, 2019, the Committee directs the Desk to roll over at auction all principal payments from the Federal Reserve's holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.
Federal Reserve Balance Sheet Composition
BALANCE SHEET "NORMALIZATION": The Federal Reserve commenced its balance sheet normalization program in Q4 2017.
Since commencement, the balance sheet has declined by $(691) billion, or (15.6)%, to $3.727 trillion. The balance sheet is expected to hover around this level going forward.
MBS holdings have declined by $(293) billion, or (16.4)%, to $1.490 trillion.
U.S. Treasury securities holdings have declined by $(364) billion, or (14.8)% to $2.101 trillion. Since 8/1/2019, the U.S. Treasury securities holdings have risen by $20 billion, or 1%.
Effective 8/1/2019, the balance sheet will held relatively level with U.S. Treasuries replacing MBS run-off.
Balance Sheet of Federal Reserve: The balance sheet of the Federal Reserve is $3.727 trillion.
Balance sheet normalization program commenced in Q4 2017 and balance sheet has shown measured, disciplined decreases totaling $(691) billion, or (15.6)%.
Commencing in August1, 2019, the Fed expects to target a balance sheet leveling off at approximately $3.6 trillion and holding primarily U.S. Treasury securities.
The graphic to the right shows the changes to the major portfolio holdings since the start of QE in 2017 and the August 2019 change allowing the run-off in both the U.S. Treasury securities holdings and in the MBS portfolio to be reinvested in U.S. Treasuries.
federal reserve u.s. treasury securities holdings
U.S. Treasury Holdings of Federal Reserve: $2.101 trillion in U.S. Treasury holdings.
Since balance sheet normalization program commenced in Q4 2017, U.S. Treasury holdings are down approximately $(364) billion, or (14.8)%.
Commencing in August 1, 2019, the Fed started to reinvest all U.S. Treasury securities maturing and, in addition, add to the portfolio by purchasing U.S. Treasury securities equivalent to the run-off in the agency MBS portfolio.
The U.S. Treasury holdings have risen $20 billion, or 1%, since commencement of this change at the beginning of August 2019.
This will result in the U.S. Treasury securities holdings rising toward $3.6 trillion from its current level of +$2 trillion.
federal reserve agency mbs holdings
MBS Holdings of Federal Reserve: $1.490 trillion in agency MBS holdings - all purchased since 2008.
Since balance sheet normalization program commenced in Q4 2017, MBS holdings have decreased $(293) billion, or (16.4)% since mid-September 2017.
Commencing August 1, 2019, the MBS portfolio will be in run-off mode.
FEDERAL RESERVE ACTIVITY IN AGENCY MBS MARKET: In recent years, the Fed has been a dominant purchaser of agency MBS.
The Fed had purchased approximately 20 to 25 percent of annual issuance of agency MBS, providing critical support to maintaining MBS market liquidity in the years at and after the mortgage crisis commenced.
With the commencement of the balance sheet normalization program which started during Q4 2017, the Fed's share of the MBS purchase market has fallen to <4% for latest twelve months with recent months at <1%.
As of August 2019, the Federal Reserve is out of the Agency MBS market.
FEDERAL RESERVE MBS HOLDINGS AS SHARE OF AGENCY MBS MARKET: With its objective to provide liquidity and stability to the Agency MBS market during the financial crisis, the Fed became a significant MBS investor.
From no MBS holdings prior to the crisis, the Fed jumped to a 20 percent market share in 2008 to a peak of 32 percent market share of agency MBS outstanding in 2014, providing critical support to maintaining MBS market liquidity in the years at and after the mortgage crisis commenced.
With the commencement of the balance sheet normalization program which started during Q4 2017, the Fed's share of the agency MBS market has slowly fallen to 20% during 2019.