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Federal Reserve Balance Sheet – How It Works
October 28th, 2013 by David Waring
The Federal Reserve Balance Sheet is a breakdown of the assets and liabilities held by the central bank. On every Thursday, generally at 04:30 P.M. Eastern Time, the Federal Reserve Statistical Release H.4.1 is issued, which summarizes the balance sheet of all the Federal Reserve banks in the United States. The balance sheet provides information about the money held as reserve and the amount and maturities of the investments owned or held by the various Federal Reserve banks. In the same H.4.1 release, the Board of Governors of the Federal Reserve System publishes the factors affecting reserves of depository institutions. For more on how the Fed works go here.
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Fed watchers rely on movements in Fed’s assets or liabilities to forecast changes in economic cycles. The weekly balance sheet became even more popular post the financial crisis of 2007-08. Just like any other bank, the Fed’s balance sheet provides a consolidated statement of its assets and liabilities, each of whose categories are listed below:
- Securities: The largest category of assets in the Fed’s balance sheet, and consists primarily of Treasury securities. The Fed controls the total amount of securities by open market operations.
- Discount loans. These are loans the Fed makes to banks and financial institutions at the discount rate to ensure they can meet the reserve requirement. A lower discount rate makes borrowing easier, while higher rates makes borrowing harder. Thus, the amount of loan is affected by where the Fed sets the discount rate.
- SDR certificate accounts: Special drawing rights (SDR) were created by the International Monetary Fund in 1969 amid concerns about the limitations of gold and dollars as the sole means of settling international financial transactions. When the Treasury acquires these drawing rights, it is credited with deposit balances at the Fed. The SDR accounts are made up of these Treasury-issued certificates.
- Gold certificate account: This consists of warehouse receipts issued to the Federal Reserve by the Treasury against its gold holdings, and represents the country’s entire official gold stock.
- Cash items in process of collection: When a check goes to the Federal Reserve for clearing, the Fed will collect funds by deducting the amount from the bank’s deposits with the Fed. Till the time these funds are cleared, the check is a cash item in process of collection and is a Federal Reserve asset.
- Coins: The smallest item in the balance sheet, and consists of currencies (primarily coins) issued by the Treasury that the Federal Reserve holds.
- Other assets: Includes foreign currency denominated deposits and bonds, as well as physical goods owned by the Fed.
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- Federal Reserve currency outstanding: It denotes the amount of Fed-issued currency that is in the hands of the public. Currency notes are IOUs from the Fed to the bearer, and have been the largest liability on the Federal Reserve’s balance sheet.
- Reserves: All banks have an account at the Fed in which they hold deposits. Reserves consist of deposits held by banks at the Fed. Currency that is physically held by banks also falls under this category. Reserves are liabilities for the Fed but assets for the banks.
- Deposits off the U.S. Treasury: It refers to the deposits that the Treasury keeps at the Fed, against which it writes its checks.
- Deferred-availability cash items: The Federal Reserve banks do not give immediate credit for all checks presented to the banks for collection by a depositing institution. Instead, it promises to credit the institution within the next two days. These promises make-up the deferred-availability items and are a liability on the balance sheet.
- Foreign deposits: Consists of dollar-denominated deposit accounts with the Fed owned by foreign governments, central banks and international agencies, such as the World Bank and the United Nations.
- Other liabilities: Includes all the remaining liabilities not included elsewhere on the Federal Reserve balance sheet. Examples include unearned discounts and discounts on securities