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June 28, 2022
The Federal Reserve’s Balance Sheet and Quantitative Easing
The Federal Reserve (Fed) has a balance sheet whose size
When the Fed purchases securities from primary dealers, it
and composition is a product of its monetary policy and
increases bank reserves (discussed below), increasing the
lender-of-last-resort decisions. As discussed below, the Fed
overall liquidity of the financial system. The Fed can also
has responded to crises by increasing its balance sheet,
provide primary dealers and foreign central banks with
which is now 10 times larger than it was before the 2008
temporary liquidity through repurchase agreements (repos).
financial crisis. As part of its efforts to tighten monetary
In a repo, the Fed temporarily purchases a Treasury security
policy, the Fed began to reduce the size of its balance sheet
or MBS with an agreement to reverse the sale in the near
in June 2022. For background, see CRS In Focus IF10054,
future. (For more information, see CRS In Focus IF11383,
Introduction to Financial Services: The Federal Reserve,
Repurchase Agreements (Repos): A Primer, by Marc
by Marc Labonte; and CRS In Focus IF11751, Introduction
Labonte.) In 2021, the Fed committed to making repo
to U.S. Economy: Monetary Policy, by Marc Labonte.
lending permanently available on demand by creating its
Standing Repurchase Agreement Facility.
Balance Sheet Primer
The Fed’s balance sheet can be described in standard
In crises, the Fed lends to banks through its discount
accounting terms. Its assets are equal in value to its
window and creates emergency programs to stabilize
liabilities and capital, as shown in Table 1. Its net income
financial markets. Through these programs, it makes or
(i.e., the difference between income and expenses) is
acquires loans and acquires private securities that are also
comparable to a private company’s profits.
assets on its balance sheet. These assets swell during crises
and then shrink relatively quickly as financial conditions
Table 1. Simplified Federal Reserve Balance Sheet
normalize. The Fed also lends dollars to foreign central
June 15, 2022, Trillions of $
banks in crises through foreign currency swaps.
Liabilities and
Liabilities
Assets
Capital
Just as the Fed increases market liquidity through repos, it
can reduce liquidity through reverse repos, in which the
Treasury Securities
$5.8
Currency
$2.2
Fed temporarily sells securities to market participants and
MBS
$2.7
Bank Reserves
$3.2
foreign central banks in exchange for cash. In 2014, the Fed
institutionalized reverse repos by creating the Overnight
Loans/Emergency
<$0.1
TGA
$0.8
Reverse Repurchase Agreement Facility. The Fed pays
Facilities
market participants an interest rate on reverse repos, which
Repos
$0
Reverse Repos
$2.4
helps the Fed maintain its monetary policy rate targets.
Liquidity Swaps
<$0.1
Other
$0.3
Banks hold reserves in accounts at the Fed to make and
Other
$0.3
Total Liabilities
$8.9
receive payments from other banks. These bank reserves
are liabilities to the Fed. Similar to reverse repos, the Fed
Paid-In Capital
<$0.1
pays banks interest on reserves that helps the Fed maintain
Surplus
<$0.1
its interest rate targets. Mechanically, when the Fed
purchases a security or makes a loan, it finances it by
Total
$8.9
Total
$8.9
creating new bank reserves. As a result, the asset and
Source: CRS calculations based on Federal Reserve data.
liability sides of the balance sheet increase by an identical
Note: Total for emergency facilities include Treasury investments.
amount so that assets always equal liabilities plus capital.
Assets
The U.S. Treasury also holds its cash balances at the Fed in
Most assets on the Fed’s balance sheet are financial
the Treasury General Account (TGA). When the
Treasury receives revenue, its balance increases, and when
securities. The Fed is permitted by law to buy or sell a
it makes payments, its balance decreases. The Fed issues
narrow range of securities and must do so on the open
paper currency, officially called Federal Reserve notes and
market (referred to as open market operations). In
commonly called cash. A Federal Reserve note is an IOU
practice, it purchases mainly Treasury securities and
from the Fed to its bearer that pays no interest. As such, it is
mortgage-backed securities (MBS) that are guaranteed by
a liability on the Fed’s balance sheet.
a federal agency or a government-sponsored enterprise
(GSE). The open market requirement means that the Fed
Capital
transacts with primary dealers, a group of large broker-
The Fed’s capital is equal in value to the difference between
dealers active in Treas ury markets, and cannot purchase
its assets and liabilities. It takes two forms. First, private
Treasury securities directly from the U.S. Treasury.
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link to page 2 The Federal Reserve’s Balance Sheet and Quantitative Easing
banks that are members of the Fed must purchase stock in
afterwards topped $1 trillion. Since the crisis, the Fed has
the Fed, called paid-in capital. Membership is required for
conducted monetary policy under an ample reserves
nationally chartered banks and optional for state-chartered
framework, where it creates sufficient reserves that banks’
banks. Unlike common stock in a private company, this
demand for reserves do not influence market interest rates.
stock does not confer ownership control and pays a
In the long run, the Fed decides how many securities to
dividend set by statute. However, it does provide the banks
hold based on the size of reserves needed under this
with seats on the boards of the 12 Fed regional banks. The
framework.
dividend is a fixed 6% for banks with under $10 billion in
assets and the lesser of 6% or the prevailing 10-year
QE occurred in three rounds between 2009 and 2014, as the
Treasury yield for banks with over $10 billion.
recovery from the financial crisis was initially weak. These
rounds varied in their size and duration. From 2014 to 2018,
The other form of capital is the Fed’s surplus. It comes
the Fed kept the size of its balance sheet steady by rolling
from retained earnings and is currently capped by statute at
over maturing assets (i.e., reinvesting the principal from
$6.825 billion. Through a series of recent acts, Congress
assets that had matured). Beginning in 2018, the Fed
first capped the surplus and then reduced the cap as a “pay
gradually reduced its balance sheet by allowing maturing
for” (budgetary offset) for unrelated legislation.
assets instead to roll off the balance sheet up to a fixed
amount (i.e., no longer reinvesting principal).
Net Income and Remittances
Table 2. Federal Reserve Balance Sheet Trends
The Fed earns income on its loans, repos, and securities,
Trillions of Dollars, 2008-2022
which, along with fees it charges, are used to finance its
expenses. Its expenses include operating expenses and the
Event (Dates)
End Size
Change
interest paid on bank reserves and repos. The difference
between income and expenses is called net income. Net
Financial Crisis (9/08-12/08)
$2.2
+$1.3
income is used exclusively to (1) pay statutorily required
QE1 (3/09-5/10)
$2.3
+$0.4
dividends to shareholders; (2) increase the surplus when it
is below its statutory cap; and (3) send back to the Treasury
QE2 (11/10-7/11)
$2.9
+$0.6
(called remittances), where they are added to the federal
government’s general revenues.
QE3 (10/12-10/14)
$4.5
+$1.7
Rol Off (9/17-8/19)
$3.8
-$0.7
Since 1935, the Fed has remitted revenue to Treasury
annually. Since 2008, its net income and remittances have
Repo Turmoil (9/19-2/20)
$4.2
+$0.4
increased significantly. It is possible that the Fed could
COVID-19 (3/20-5/22)
$8.9
+$4.8
have negative net income if its expenses exceeded its
income in the future. Although this has not happened to
Source: CRS calculations based on Federal Reserve data.
date, it could happen if the interest rate it pays on bank
In 2019, repo market volatility convinced the Fed that more
reserves and reverse repos became higher than the yield on
bank reserves were needed to operate its ample reserves
the securities it held. If the Fed’s net income became
framework, so it began making repos and purchasing assets,
negative, it would temporarily stop remitting funds to the
and the balance sheet increased again. When the COVID-19
Treasury. But unlike a private company, under the Fed’s
pandemic began, the pace of repo lending and asset
accounting conventions it would not reduce its capital,
purchases increased and emergency facilities were
become insolvent, or require a capital infusion to maintain
introduced, causing faster balance sheet growth. In
solvency. Instead, it would register the losses as a deferred
November 2021, responding to high inflation, the Fed
asset. Unlike a private company, the Fed cannot be
announced that it would taper off its asset purchases (i.e.,
compelled by its creditors to declare bankruptcy.
purchase fewer assets per month). In March 2022, it ended
Nevertheless, there might be political implications—
asset purchases, at which point the balance sheet had more
notably for its independence—if the Fed experienced
than doubled from its pre-pandemic size. In June 2022, it
losses.
began to shrink its balance sheet, popularly called
Quantitative Easing and Tightening
quantitative tightening, by allowing initially up to $30
billion of Treasury securities and $17.5 billion of MBS to
Before the 2008 financial crisis, the Fed’s balance sheet
roll off the balance sheet each month for the foreseeable
grew modestly over time. During that crisis, the Fed created
future. The balance sheet is not expected to return to its pre-
a number of emergency lending programs that caused its
pandemic size, however.
balance sheet to balloon (see Table 2). In addition, the Fed
wanted to provide more monetary stimulus after reducing
The goals of QE were to reduce long-term interest rates and
interest rates to zero. For the first time, it made monthly
provide additional liquidity to the financial system. QE
large-scale asset purchases, popularly called quantitative
reduced long-term interest rates by driving down yields on
easing (QE), at a preannounced rate that also caused the
the securities the Fed was purchasing, which led to lower
balance sheet to increase rapidly. The Fed purchased
interest rates throughout the economy. The reduction in
Treasury securities and debt and MBS issued by
yields on MBS translated to lower mortgage rates,
government agencies and GSEs. The increase in assets was
stimulating housing demand. QE increased liquidity by
matched by an increase in liabilities —mainly bank reserves,
increasing bank reserves.
which were kept at the minimum level needed to meet
Marc Labonte, Specialist in Macroeconomic Policy
reserve requirements before the financial crisis but
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The Federal Reserve’s Balance Sheet and Quantitative Easing
IF12147
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