During Friday's speech at the Federal Reserve Bank of Richmond 2009 Credit Markets Symposium, Chairman Ben Bernanke gave a brief outline of the Fed's balance sheet and discussed how the Federal Reserve and other central banks are developing new tools to ease financial conditions and support economic growth, since "[w]e no longer live in a world in which central bank policies are confined to adjusting the short-term interest rate." As part of the intuitive to implement "credit easing," the Fed has established and expanded a number of liquidity programs and recently initiated a large-scale program of asset purchases nearly doubling the Fed's balance sheet from "roughly $870 billion before the crisis to roughly $2 trillion."
Chairman Bernanke broke down the asset side of the balance sheet into the following three broad categories:
- Short-term credit - Extended to support the liquidity, on a collateralized basis, of financial firms such as depository institutions, broker-dealers, and money market mutual funds. These assets "total almost $860 billion and today represents nearly 45 percent of the assets" on the Fed's balance. These assets, which are fully secured and for maturities no greater than 90 days, involve mostly lending to commercial banks and primary dealers through the Term Auction Facility, as well as currency swaps with other central banks through liquidity swap lines.
- Assets related to programs focused on broader credit conditions - The Commercial Paper Funding Facility (CPFF) and the Term Asset-Backed Securities Loan Facility (TALF), which are geared to improve the functioning of key credit markets by lending directly to market participants, including ultimate borrowers and major investors. "The lending associated with these facilities is currently about $255 billion, corresponding to roughly one-eighth of the assets on the Fed's balance sheet."
- Holdings of high-quality securities - In particular Treasury securities, agency debt, and agency-backed mortgage-backed securities (MBS) totaling "about $780 billion, or about three-eighths of Federal Reserve assets." The Fed's holdings of high-quality securities are "set to grow considerably" as the Federal Open Market Committee has recently announced large-scale open-market purchases of these securities, including purchasing cumulative amounts of up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of the year, and up to $300 billion of longer-term Treasury securities over the next six months.
With respect to the liability side of the Federal Reserve's balance sheet, Chairman Bernanke discussed how the balances held in accounts maintained by depository institutions at the Federal Reserve have also increased substantially. As a result, these large volume of reserve balances outstanding must be "monitored carefully, as--if not carefully managed--they could complicate the Fed's task of raising short-term interest rates when the economy begins to recover or if inflation expectations were to begin to move higher."