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The Federal Reserve's balance sheet and earnings: a primer and projections

Author

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  • Seth B. Carpenter
  • Jane E. Ihrig
  • Elizabeth C. Klee
  • Daniel W. Quinn
  • Alexander H. Boote

Abstract

Over the past few years, the Federal Reserve's use of unconventional monetary policy tools has led it to hold a large portfolio of securities. The asset purchases are intended to put downward pressure on longer-term interest rates, but also affect the Federal Reserve's balance sheet and income. We present a framework for projecting Federal Reserve assets and liabilities and income through time. The projections are based on public economic forecasts and announced Federal Open Market Committee policy principles. The projections imply that for the next several years, the Federal Reserve's balance sheet remains large by historical standards, and earnings remain high. Using the FOMC's stated exit strategy principles and the Blue Chip financial forecasts of the federal funds rate, the projections have the Federal Reserve's portfolio beginning to contract in 2015, returning to a more normal size in 2018 or 2019, and returning to a more normal composition a year thereafter. The projections imply that Federal Reserve remittances to the Treasury may decline for a time, and in some cases fall to zero. Once the portfolio is normalized, earnings are projected to return to their long-run trend. On net over the entire period of unconventional monetary policy actions, cumulative earnings are higher than what they might have been without the Federal Reserve asset purchase programs. To illustrate the interest rate sensitivity of the portfolio, we consider scenarios where interest rates are 100 basis points higher or lower than in the baseline. With higher interest rates, earnings tend to fall a bit more and remittances to the Treasury stop for a longer period than in our baseline projections, while with lower interest rates earnings are a bit larger and remittances continue throughout the projection period. .

Suggested Citation

  • Seth B. Carpenter & Jane E. Ihrig & Elizabeth C. Klee & Daniel W. Quinn & Alexander H. Boote, 2013. "The Federal Reserve's balance sheet and earnings: a primer and projections," Finance and Economics Discussion Series 2013-01, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2013-01
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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. Peter Stella & Ulrich H Klueh, 2008. "Central Bank Financial Strength and Policy Performance; An Econometric Evaluation," IMF Working Papers 08/176, International Monetary Fund.
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    Cited by:

    1. Williams, John C., 2016. "After the first rate hike," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    2. 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.
    3. 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.
    4. 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.
    5. repec:eee:japwor:v:42:y:2017:i:c:p:1-11 is not listed on IDEAS
    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. repec:eee:exehis:v:69:y:2018:i:c:p:27-49 is not listed on IDEAS
    8. Keister, Todd & Martin, Antoine & McAndrews, James J., 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    9. 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.
    10. Ennis, Huberto M., 2018. "A simple general equilibrium model of large excess reserves," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 50-65.
    11. 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.
    12. 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.
    13. Benigno, Pierpaolo & Nisticò, Salvatore, 2015. "Non-Neutrality of Open-Market Operations," CEPR Discussion Papers 10594, C.E.P.R. Discussion Papers.
    14. 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.
    15. 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.
    16. 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 (US).
    17. 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, Research Department.
    18. 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.
    19. Fei Han, 2014. "Measuring External Risks for Peru; Insights from a Macroeconomic Model for a Small Open and Partially Dollarized Economy," IMF Working Papers 14/161, International Monetary Fund.
    20. Williams, John C., 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.

    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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