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The Federal Reserve's Balance Sheet and Earnings: A Primer and Projections

Author

Listed:
  • Seth Carpenter

    (Federal Reserve Board)

  • Jane Ihrig

    (Federal Reserve Board)

  • Elizabeth Klee

    (Federal Reserve Board)

  • Daniel Quinn

    (Federal Reserve Board)

  • Alexander Boote

    (Federal Reserve Board)

Abstract

Over the past few years, the Federal Reserve’s use of unconventional monetary policy tools has received a vast amount of public attention, from discussing how these asset purchases have put downward pressure on longer-term interest rates and thus supported economic activity to evaluating the implications for Federal Reserve remittances to the Treasury and the effect on monetary and fiscal policy. As the economic recovery has gained some momentum of late, the focus has turned to issues associated with the normalization of monetary policy. In this paper, we begin by providing a primer for the Federal Reserve’s balance sheet and income statement. With that foundation in place, we then consider a variety of scenarios consistent with statements by Federal Reserve officials about how the FOMC will normalize policy, including whether to sell mortgage-backed securities, whether to change the composition of Federal Reserve liabilities, and the timing of lifting the federal funds rate off from the zero lower bound. In each of these scenarios, we discuss the implications of these normalization policies on the size and composition of Federal Reserve asset and liability holdings and on remittances of earnings to the Treasury, which capture the interest rate risk of these normalization policies. We show that under a baseline normalization strategy described by policymakers, the balance sheet should slowly return to a more normal composition and size, while remittances should remain sizable. With some alternative normalization plans, especially if faced with high interest costs, remittances could drop to zero for some time.

Suggested Citation

  • Seth Carpenter & Jane Ihrig & Elizabeth Klee & Daniel Quinn & Alexander Boote, 2015. "The Federal Reserve's Balance Sheet and Earnings: A Primer and Projections," International Journal of Central Banking, International Journal of Central Banking, vol. 11(2), pages 237-283, March.
  • Handle: RePEc:ijc:ijcjou:y:2015:q:2:a:7
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    References listed on IDEAS

    as
    1. Canlin Li & Min Wei, 2013. "Term Structure Modeling with Supply Factors and the Federal Reserve's Large-Scale Asset Purchase Progarms," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 3-39, March.
    2. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    3. Canlin Li & Min Wei, 2012. "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs," Finance and Economics Discussion Series 2012-37, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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