The Federal Reserve (or “Fed”) is the central bank of the United States, in charge of setting interest rates, regulating banks, maintaining the stability of the financial system, and providing financial services such as swap lines (which temporarily provide foreign central banks with dollars).
The Fed has its own balance sheet, which means its owns assets such as US government bonds (“Treasuries”) and has liabilities such as reserves (cash which financial institutions keep with the Fed) and currency (which technically counts as a liability because the Fed “owes” you things for the dollars you hold – historically it was gold, but now it is other assets such as bonds).
- In the aftermath of the Great Recession from 2008, the Fed undertook Quantitative Easing (QE), which means it created new money to buy bonds and loans. This increased its balance sheet from roughly $1 trillion in 2008 to $4.5 trillion in 2014.
- From 2014 to 2018, the Fed stopped buying additional bonds and loans under QE, and its balance sheet stabilized.
- From 2018 to 2019, the Fed started to sell some of its assets, but this only reduced the balance sheet to around $3.8 trillion.
- Around the Covid-19 outbreak, the Fed started buying assets again and also temporarily provided dollars to other central banks. This has ballooned the Fed’s balance sheet to around $6.6 trillion today.
Graph produced on Python, data from Federal Reserve.