Federal Reserve Balance Sheet Charts – We’ve entered the final month of ‘QE2′

An update of the Fed balance sheet charts for 2/6/11. The calendar has ticked into June, so we’ve entered the final month of QE2.


Federal Reserve Balance Sheet Chart

Click to enlarge. Source: Federal Reserve

Federal Reserve Balance Sheet Chart (Proportional)

Click to enlarge.


[The first chart shows the Federal Reserve's assets as recorded on the 'factors affecting reserve balances' statistical release. The second chart shows those assets on a proportional basis. That is, the latter chart shows the Fed's various assets as a percentage of its total assets.]


The famed ‘QE2′ program is set to finish this month, and the drastic change to the Federal Reserve’s balance sheet can be seen on the charts above. The total size of the Fed’s balance sheet has increased from around $2.3 trillion (in November 2010) to around $2.8 trillion (latest). That’s an astonishing increase for such a short period of time, and – no doubt – it has been dilutive for the dollar.


However, that being said, the composition of the Federal Reserve’s balance sheet has also changed drastically. As can be seen from the second chart above, QE2 has implied a proportional shift away from Mortgage-backed securities and towards US Government notes and bonds. Looking at the composition of the Fed’s assets since 2003, we can see that this set-up is more ‘traditional’ (so to speak). On the eve of QE2, US Government notes and bonds represented around 33% of the Fed’s total assets, whereas today they represent of over 50% of the Fed’s total assets.


This is important because the Fed can tinker with the dollar in terms of quantity and quality. This is demonstrable by the events of 2007-2009. The private-sector had reached a maximum capacity for leverage (i.e. for the production of ‘IOU money’) by 2007. The peak manifested itself in an enormous housing bubble that affected all parts of the economy. This interconnectedness of the housing market and the wider economy was deemed to be a ‘systemic risk’. Hence, when large institutions found that they owed way too many dollars and owned decreasingly appetizing MBSs, the Fed indulgently stepped in. They made dollars ‘good for’ mortgage-backed securities, and so – rather magically – the burdens upon said large institutions fizzled away. As everyone else owed dollars and owned better assets than MBSs, they came back from insolvency as well.


The point is that many speculative entities were saved by those changes to the Federal Reserve’s balance sheet (and by implication to the dollar). Therefore, if QE2 has acted to undo some of those changes, it is quite conceivable that we could enter another period of financial distress.

See here for our collection of rare historical economic data.

Posted Jun 3, 2011