Why has the size of the Federal Reserve’s balance changed over time?
The size of the Federal Reserve's balance sheet, in the long run, is determined by the trend growth of the public's demand for Fed liabilities, including physical currency, reserves, and reverse repurchase agreements. The size and composition of the Fed's balance sheet can also change in response to economic and financial crises, changes in structural factors in the financial system, and changes in the Fed's approach to implementing monetary policy.
In 2008 and 2020, the Fed initiated large scale asset purchase programs to support the flow of credit to U.S. households and businesses and foster economic recovery. In these programs, the Federal Open Market Committee (FOMC) purchased large amounts of longer-term Treasury securities and government agency securities in an effort to put downward pressure on longer-term interest rates and ease overall financial conditions. The large-scale asset purchases conducted in the wake of the financial crisis and the COVID-19 pandemic were successful in providing additional policy accommodation at a critical time and in supporting the U.S. economy. Following both actions, once economic and financial conditions had sufficiently improved, the FOMC initiated a process to reduce its securities holdings over time in a predictable manner, thus reducing the size of the Fed's balance sheet.
The long-run size of the balance sheet will also partially reflect the trend growth in the U.S. economy. In addition, structural changes, including liquidity regulations and liquidity risk management in the banking system, have substantially increased the public's demand for reserves and other Fed liabilities.
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