W(h)ither the Fed's Balance Sheet?

Sep 21, 2026

Uploaded by Aurora

Economic Commentary analyzing how the Federal Reserve balance sheet has changed since September 2008 and how those changes have shaped monetary policy decisions. It explains the shift from traditional interest rate targeting to credit-easing, focusing on the size and composition of loans and securities, and the resulting limits of summarizing policy only through the federal funds rate. It also traces policy evolution from early credit easing and LSAP expansions to conditions-based sequencing for removing accommodation, with emphasis on credibility and excess reserves.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

Early Stages of Credit Easing

Beyond the Zero Bound

Removing Policy Accommodation

# W(h)ither the Fed's Balance Sheet? John B.Carlson,foseph G.Haubrich,and John Lindner The Federal Reserve balance sheet's size and composition have changed dramatically since September 2008.FederalReserve policymakers have expressed their support for eventually shrinking the Fed's balance sheet and returning thecomposition of its securities portfolio to include only U.S.Treasury issues.Through the careful study of public FederalOpen Market Committee documents,this Economic Commentary concisely explains some of the FOMC's decisionsconcerning an appropriate sequence of policy actions.. Monetary policy over the past three years has been a non-stop stream of nimble responses to unprecedented challenges.The traditional interest rate target framework for imple-menting monetary policy has evolved into a “credit-easing”approach in response to the financial crisis.This new ap-proach focuses on the mix of loans and securities the FederalReserve holds and how the mix of these assets affects creditconditions for households and businesses. One implication of the new approach is that the stance ofmonetary policy can no longer be easily summarized by atarget for the federal funds rate.The Fed's balance sheet hasbecome a crucial tool of monetary policy.This Economic Com-mentary explains recent policy actions in terms of changes inthe size and composition of the balance sheet and also drawsout the likely sequencing of actions based on careful studyof the FOMC meeting minutes.Under current policy,theFed's balance sheet is set to diminish slowly(wither).Whatpath it will take going forward(whither),however,will de-pend on the evolution of economic and financial conditions. ## Early Stages of Credit Easing When financial turmoil first emerged in the summer of2007,inflationary pressures were a concern,and the FOMCwas reluctant to lower the fed funds rate from its then targetof 54 percent.So the initial response was to provide creditthrough the Fed's traditional facility for banks,the DiscountWindow.But the liquidity failed to spread to nonbankfinancial intermediaries,and a number of new lendingfacilities were created to provide credit to a broader array offinancial institutions and to targeted markets.In September2007,the FOMC also began to ease its policy stance usingits traditional tool,lowering the fed funds rate to 2 percentby the end of its April 2008 meeting.In March 2008,the Fedinvoked Section 13(3)of the Federal Reserve Act to allow it Number 2010-8 July 28,2010 to provide secured credit directly to primary dealers.Duringthe first year of the turmoil,the credit-easing policies affectedthe composition but not the size of the balance sheet. This changed when Lehman Brothers filed for bankruptcyin September 2008.Additional credit channels developed toprovide credit directly to the commercial paper and money-fund markets generated a surge in loans that more than dou-bled the size of the balance sheet within a few weeks.Someof the new loans were a direct result of support provided tosystemically important institutions,such as the loan made toAIG.Other new facilities channeled liquidity to the commer-cial paper market and to money market mutual funds.Theconsequences for both the size and composition of the Fed'sbalance sheet were dramatic,as can be seen in figure 1, Figure 1.The Federal Reserve Balance Sheet Trillions of dollars Source:The Federal Reserve Board. ## Beyond the Zero Bound By the time of the Lehman bankruptcy,the Fed had vastlydepleted its arsenal of interest rate cuts as measures forpolicy stimulus.In October 2008,the FOMC lowered thefed funds rate to 1 percent.A further reducion in Decem-ber essentially took the policy rate to its zero bound. In November 2008,prior to reaching the zero bound,theFederal Reserve announced a program to purchase thedirect obligations of housing-related government-sponsoredenterprises (GSEs)-Fannie Mae,Freddie Mac,and theFederal Home Loan Banks-and mortgage-backed securiti

FAQs

What monetary policy approach replaced the traditional interest rate framework after the financial crisis?

The commentary describes a shift to a “credit-easing” approach that emphasizes the mix of loans and securities on the Fed’s balance sheet and how that mix affects credit conditions for households and businesses.

How did Lehman Brothers’ bankruptcy change the Fed’s balance sheet policies?

After the September 2008 bankruptcy, additional credit channels developed, generating a surge in loans that more than doubled the balance sheet size within weeks, with major impacts on both size and composition.

Why does the document focus on removing policy accommodation at the right pace and time?

It argues that maintaining credibility depends on unwinding extraordinary accommodation appropriately; while loan programs expired and loans were repaid, security purchases and elevated excess reserves create potential risks to maintaining price stability.

Sep 21, 2026

Uploaded by Aurora