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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. Peter Stella & Ulrich H Klueh, 2008. "Central Bank Financial Strength and Policy Performance; An Econometric Evaluation," IMF Working Papers 2008/176, International Monetary Fund.
    2. 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.
    3. 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.
    4. 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.).
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Do central banks need capital?
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-05-26 17:19:47
    2. Open Letter to Senator Rand Paul
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-08-23 18:43:47
    3. Open Letter to Senator Rand Paul
      by Stephen G. Cecchetti in Huffington Post Business on 2015-09-06 19:54:41

    Citations

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    Cited by:

    1. John C. Williams, 2016. "After the first rate hike," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    2. King, Thomas B., 2019. "Expectation and duration at the effective lower bound," Journal of Financial Economics, Elsevier, vol. 134(3), pages 736-760.
    3. Donato Masciandaro, 2016. "More than the Human Appendix: Fed Capital and Central Bank Financial Independence," BAFFI CAREFIN Working Papers 1635, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2015. "A probability-based stress test of Federal Reserve assets and income," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 26-43.
    5. Caballero, Diego & Lucas, André & Schwaab, Bernd & Zhang, Xin, 2020. "Risk endogeneity at the lender/investor-of-last-resort," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 283-297.
    6. Stephen Quinn & William Roberds, 2016. "Death of a Reserve Currency," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 63-103, December.
    7. Jaremski, Matthew & Mathy, Gabriel, 2018. "How was the quantitative easing program of the 1930s Unwound?," Explorations in Economic History, Elsevier, vol. 69(C), pages 27-49.
    8. Pierpaolo Benigno & Salvatore Nisticò, 2020. "Non-neutrality of Open-Market Operations," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(3), pages 175-226, July.
    9. Alyssa G. Anderson & Jeff W. Huther, 2016. "Modelling Overnight RRP Participation," Finance and Economics Discussion Series 2016-023, Board of Governors of the Federal Reserve System (U.S.).
    10. Foerster, Andrew T., 2015. "Financial crises, unconventional monetary policy exit strategies, and agents׳ expectations," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 191-207.
    11. Reis, Ricardo, 2015. "Comment on: “when does a central bank’s balance sheet require fiscal support?” by Marco Del Negro and Christopher A. Sims," LSE Research Online Documents on Economics 65867, London School of Economics and Political Science, LSE Library.
    12. John C. Williams, 2016. "Trick of the light? The U.S. economy, global growth, and international risks in perspective. A speech at the Lee Kuan Yew School of Public Policy and U.S. Embassy Speaker Series, Singapore, Singapore,," Speech 165, Federal Reserve Bank of San Francisco.
    13. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    14. Fujiki, Hiroshi & Tomura, Hajime, 2017. "Fiscal cost to exit quantitative easing: the case of Japan," Japan and the World Economy, Elsevier, vol. 42(C), pages 1-11.
    15. Todd Keister & Antoine Martin & James J. McAndrews, 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    16. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    17. Chan-Guk Huh & Jie Wu, 2015. "Linkage between US monetary policy and emerging economies: the case of Korea?s financial market and monetary policy," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 4(3), pages 1-18, September.
    18. repec:baf:cbafwp:cbafwp20153 is not listed on IDEAS
    19. Chan-Guk Huh, 2015. "Normalization of unconventional US monetary policy and its implications: Korea?s monetary policy case," Proceedings of International Academic Conferences 2504115, International Institute of Social and Economic Sciences.
    20. Ricardo Reis, 2015. "Different Types of Central Bank Insolvency and the Central Role of Seignorage," NBER Working Papers 21226, National Bureau of Economic Research, Inc.
    21. Michal Franta & Tomas Holub & Branislav Saxa, 2018. "Balance Sheet Implications of the Czech National Bank's Exchange Rate Commitment," Working Papers 2018/10, Czech National Bank.
    22. Atsushi Tanaka, 2020. "Central Bank Capital and Credibility: A Literature Survey," Discussion Paper Series 208, School of Economics, Kwansei Gakuin University, revised May 2020.
    23. Albert, Juan-Francisco & Peñalver, Antonio & Perez-Bernabeu, Alberto, 2020. "The effects of monetary policy on income and wealth inequality in the U.S. Exploring different channels," Structural Change and Economic Dynamics, Elsevier, vol. 55(C), pages 88-106.
    24. Fei Han, 2014. "Measuring External Risks for Peru; Insights from a Macroeconomic Model for a Small Open and Partially Dollarized Economy," IMF Working Papers 2014/161, International Monetary Fund.

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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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