More On The Fed’s Inflated Balance Sheet

  • The Financial Times – Reminder: A “normalised” Fed balance sheet won’t be normal-sized

    Even before the Fed addresses the tougher questions — how it wants to control interest rates, and who it wants to trade with — the balance sheet should probably be around $2.1tn, Logan says. (For context, the Fed currently owns about $2.5tn of Treasuries and $1.8tn of mortgage-backed securities. With our emphasis, and explanation in brackets: “In projecting the size of the normalized balance sheet, one can make assumptions about the long-run trends that will determine future levels for each of these non-reserve liabilities, subject to various kinds of uncertainty. Even taken at today’s levels, the TGA [the Treasury’s account with the Fed], other deposits, and the foreign repo pool alone account for about $600 billion of the Federal Reserve’s current balance sheet size. Adding on currency outstanding brings this set of non-reserve liabilities to $2.1 trillion today, and this set is likely to grow as the economy continues to expand. This sum does not yet consider reserves or ON RRPs.

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