In addition to setting the Federal Funds Rate, the Federal Reserve can use its balance sheet to meet their primary goals of maximum employment and stable prices. The Fed decides what assets it holds, and whether to expand or shrink its holdings. When the Federal Reserve buys debt instruments like Treasury notes or mortgage-backed securities, it is signaling a looser monetary policy to support the economy (sometimes referred to as “quantitative easing.”). Conversely, the sale of assets is a policy tightening approach that constrains financial conditions and asset values (referred to as “quantitative tightening.”)
As you can see from the graph below, the Federal Reserve dramatically expanded its securities holdings in response to the economic shocks of the 2008 global financial crisis and the COVID-19 pandemic.
- The red area represents the Federal Reserve holdings of U.S. Treasuries.
- The green area represents the Federal Reserve holdings of mortgage-backed securities
- The blue area is everything else on the balance sheet (e.g., currency, gold, loans, Federal agency debt, etc.)
The left axis for the chart below is in the millions of dollars (e.g., $1,000,000 = 1 trillion dollars).
Using the same color scheme (adding purple for the total) you can see the most recent weekly change in the assets held. Again, the left axis for the chart below is in the millions of dollars