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10 17 2015 | by Victor Xing | Central Banks

How did Federal Reserve’s QE expand its balance sheet?

Under quantitative easing, a central bank’s balance sheet expands when newly created electronic cash is used to buy bonds on the open market.

As a result of the transactions, banks (brokers) receive the newly created cash, which then become new bank reserves.  The central bank receives bonds, which will be treated as assets.

The more bonds the central bank buys (without selling), the bigger its balance sheet gets.

Below are Federal Reserve’s assets as of end of July 2015.  Note the “Securities held outright” section – this represents total notional value of bonds held on the FED’s SOMA account.

Federal Reserve Balance Sheet - 2015
Federal Reserve Balance Sheet – 2015

Report from June 2009 – notice the large difference in U.S. Treasury securities and MBS

Federal Reserve Balance Sheet - 2009
Federal Reserve Balance Sheet – 2009

Next article10 16 2015 | by Victor Xing | Central Banks

What are negative effects from the FED’s “ultra-expansionary monetary policy”