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 BALANCE SHEET
Federal Reserve notes: these notes are the currency of the United States.
Depository institution deposits: banks deposit their required reserve balances and excess reserve balances.
Treasury deposits: this is the general account of the U.S. Treasury held at the Reserve Banks pursuant to their role as fiscal agent and depositary of the United States.
Reverse repurchase agreements: the Federal Reserve Bank of New York (FRBNY) may engage in sales of securities under agreements to repurchase.
Federal Reserve Statement Regarding Monetary Policy Implementation (October 11, 2019):
“Consistent with its January 2019 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, the Committee reaffirms its intention to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve's administered rates, and in which active management of the supply of reserves is not required. To ensure that the supply of reserves remains ample, the Committee approved by notation vote completed on October 11, 2019 the following steps:
In light of recent and expected increases in the Federal Reserve's non-reserve liabilities, the Federal Reserve will purchase Treasury bills at least into the second quarter of next year in order to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.
In addition, the Federal Reserve will conduct term and overnight repurchase agreement operations at least through January of next year to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation.
These actions are purely technical measures to support the effective implementation of the FOMC's monetary policy, and do not represent a change in the stance of 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.
Most recently, the Fed indicated that it will add short-term treasuries to accommodate additional repo requirements.
The result of these actions will be to have a balance sheet approaching $4 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 OF KEY ASSETS
BALANCE SHEET "NORMALIZATION": The Federal Reserve commenced its balance sheet normalization program in Q4 2017.
Since commencement, the balance sheet has declined by $(418) billion, or (9.5)%, to $4.000 trillion. The balance sheet is expected to slightly from this level going forward.
MBS holdings have declined by $(337) billion, or (18.9)%, to $1.446 trillion.
U.S. Treasury securities holdings have declined by $(271) billion, or (11.0)% to $2.194 trillion. Since 8/1/2019, the U.S. Treasury securities holdings have risen by $114 billion, or 5.5%.
Effective 8/1/2019, the balance sheet will be held level or modestly higher with U.S. Treasuries replacing MBS run-off.
Balance Sheet of Federal Reserve: The balance sheet of the Federal Reserve is $4.000 trillion.
Balance sheet normalization program commenced in Q4 2017 and balance sheet has shown measured, disciplined decreases totaling $(418) billion, or (9.5)%.
The Fed now expects to target a larger balance sheet leveling off at approximately $4 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: $2.194 trillion in U.S. Treasury holdings.
Since balance sheet normalization program commenced in Q4 2017, U.S. Treasury holdings are down approximately $(271) billion, or (11.0)%.
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 $114 billion, or 5.5%, 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: $1.446 trillion in agency MBS holdings - all purchased since 2008. One of the objectives was to stabilize the MBS market.
Since balance sheet normalization program commenced in Q4 2017, MBS holdings have decreased $(337) billion, or (18.9)% 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 essentially 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 17 percent market share in 2009 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 below 20% during 2019.