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We are now in the longest expansion on record
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Source: NBER 123
20 40 60 80 100 120 140 58‐60 61‐69 70‐73 75‐80 80‐81 82‐90 91‐01 01‐07 09‐today
Duration of Expansion
months
Why Is the Feds Balance Sheet Still So Big? Council on Economic - - PowerPoint PPT Presentation
Why Is the Feds Balance Sheet Still So Big? Council on Economic - - PowerPoint PPT Presentation
Why Is the Feds Balance Sheet Still So Big? Council on Economic Education October 4, 2019 Sylvain Leduc Executive Vice President & Research Director We are now in the longest expansion on record Duration of Expansion months 140 123
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But back in 2009, the picture was not so rosy
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Unemployment Rate 10% Fed Funds Rate Target 0.125% Unconventional Monetary Policies Forward guidance Quantitative easing
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Since then, unemployment has steadily declined…
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....and the fed funds rate lifted off in 2015
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So why is the Fed’s balance sheet still so big?
Treasury Securities Agency Securities Treasury Securities Currency Currency Reserves
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The Fed’s balance sheet: A look under the hood
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- Assets
- Treasury Securities
- Agency Securities
- Liabilities
- Currency
- Treasury General Account
- Reserves
Key elements of the balance sheet
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The balance sheet is larger than before the crisis
Treasury Securities Currency
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The balance sheet is larger than before the crisis
Treasury Securities Agency Securities Treasury Securities Currency Currency Reserves
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Communicating with the broad public A Topic a Minute
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The Fed’s larger balance sheet is here to stay
- Currency in circulation has increased
- Fed decided to conduct policy with “ample” reserves
using interest on reserves to affect the fed funds rate
- Provides advantages for monetary policy and financial stability
- Differs from the pre-crisis system of “scarce” reserves
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Pre-2008 policy was conducted with “scarce” reserves
Federal Funds Rate Quantity of Reserves Supply of Reserves Banks’ Demand for Reserves Target rate
Increases in the supply of reserves lower the federal funds rate
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Policy is now conducted with “ample” reserves
Interest Rate Quantity of Reserves Banks’ Demand for Reserves Supply of Reserves Interest rate
- n reserves
Through arbitrage: Increases in interest on reserves raises the federal funds rate
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Monetary policy in a low growth, low interest rate world
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Slow growth is the problem of our time
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Output depends on
(i) Labor force (worker hours) (ii) Productivity (output per hour)
What determines trend GDP growth?
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Demographics imply slow labor force growth
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Productivity growth has been modest
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Annual trend growth likely around 1.8%
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Low growth is partly keeping interest rates low
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Decline in policy space
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Low growth is partly keeping interest rates low
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- Lack of conventional policy “space”
- Thus, unconventional policies are likely to be used
during future downturns
- QE can be seamlessly implemented in a regime of
“ample” reserves
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QE seamlessly implemented with “ample” reserves
Interest Rate Quantity of Reserves Banks’ Demand for Reserves Supply of Reserves Interest rate
- n reserves
QE QE can be introduced without changing the implementation of monetary policy and the policy rate
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A few takeaways
- The Fed’s larger balance sheet is here to stay
- Policy will be conducted with “ample” reserves using
interest on reserves to affect the federal funds rate
- Seamlessly accommodates QE when needed
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More on the topic at frbsf.org
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