An In-Depth Look at the Fed's Balance Sheet

Ten years ago, the U.S. Fed launched the first of several rounds of Quantitative Easing in response to the Global Financial Crisis. This drastically increased the size of its balance sheet. Since then, the Fed has been looking to roll back this expansion in an effort to “normalise” monetary policy. Let's see what this looks like.px.gif

As always, the St. Louis Fed's economic data portal FRED is the place to go for all things data. FRED offers a treasure trove of economic information, easily accessible from within R and other programming languages.

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Interactive plotly chart · R script

Using the pdfetch package, we first fetch the relevant data series from FRED via pdfetch_FRED(c("WALCL", "WGCAL", ...). We also consolidate some of the less prominent balance sheet items into broader categories. After that, we reshape the data for ggplot2 and create an area plot. To plot liabilities in negative territory, we multiply the relevant balance sheet items by -1 and reverse their ordering using bs.order <- c(grep("^a", bs.names, value = TRUE), rev(grep("^l", bs.names, value = TRUE))).

We also want an interactive plotly version of the chart. We first reduce the data frequency to monthly (this helps with payload size and makes the graph more responsive), then feed the individual time series to plotly in a loop to create a stacked bar chart. With bar charts, plotly allows users to display specific components separately, which can provide a better understanding of how different series relate to each other. Click here for the interactive plot.

Looking at the balance sheet we see that the Fed primarily held “claims on the government” (US Treasury bills and bonds) on its asset side before the crisis. But there's a noticeable pick-up in “claims on the private sector” after the crisis. This includes items such as Mortgage-Backed Securities, agency debt, and the portfolio of Maiden Lane, among others, which the Fed acquired following the collapse of Lehman Brothers. We also see a spike in “foreign reserves” around the same time, as foreign central banks tapped into their liquidity swaps with the Fed to inject dollar liquidity into their own markets. The expansion of the Fed's assets was almost perfectly mirrored by an increase in “notes” and “bank reserves” on the liability side.