12. THE FED’S BALANCE SHEET..................................................................
This chapter explains the items on the Federal Reserve’s balance sheet and uses more T-
account transactions. For instance, the students learn how the Fed clears a check between two
banks. Then we derive an equation that relates changes in the Fed’s assets and liabilities to the
monetary base and money supply. Then students learn whether a government issues securities to
cover a budget deficit impacts its central bank’s balance sheet, monetary base, and money
supply. Finally, a central bank can intervene in its currency exchange markets to strengthen or
weaken its currency.
The Fed’s Balance Sheet
Similar to any corporation or business, the Federal Reserve has a balance sheet. The Fed’s
assets are anything of value the Fed owns. Moreover, the Fed has liabilities, which are
obligations and debt the Fed owes to another party. After we subtract the Fed’s total assets from
total liabilities, the remainder becomes the Fed’s net worth. The Fed publishes its balance sheet
in the Federal Reserve Bulletin, and the public has free access to it. The Federal Reserve
Bulletin is a monthly publication of the Board of Governors that includes money supply
numbers, interest rates, and other economic data. Each Federal Reserve’s asset, liability, and net
worth are itemized in Table 1 for September 26, 2012: The word consolidated means all assets,
liabilities, and capital for all 12 Federal Reserve district banks are added together.
The Fed’s Assets: Securities are the largest holdings of the Fed’s assets, and they consist of U.S. government
securities: T-bills, T-notes, and T-bonds. When the Fed uses open-market operations, it
buys and sells securities. The Federal Reserve held $1.7 trillion in securities in 2012. Mortgage-Backed Securities: The Federal Reserve purchased mortgage securities from the
commercial banks and public corporations during the 2008 Financial Crisis. These
mortgages are bad loans, where the borrowers defaulted. The Fed purchased $835 billion in
mortgage-back securities, removing the bad loans from the banking industry. Discount Loans are Federal Reserve loans funds to banks, helping the banks overcome
short-term liquidity problems. The Fed controls the interest rate on these loans, which
influence the amount of loans that banks need. We call the interest rate the discount rate.
The Fed loaned $1.7 billion to the commercial banks in 2012. Items in the Process of Collection (CIPC) are assets that arise from the Fed's check
clearing process, and it equaled $138 million in 2012. We show the check clearing process
in this chapter.