What it has already done?
Lowered the Fed funds rate
Lowered the Discount window rate
Term Auction Facility, Term Securities lending facility - offer Treasury in lieu of less liquid collateral(pre-defined), Primary Dealer Credit Facility - the facility that Fed generally uses in other times as well
Enabled investment banks etc. to borrow directly from the FED - earlier it was only the regulated banks
Pumped money for the Bear Stearns deal. Guarantee to take on its books dubious mortgage - provide guarantee.
Result: Not enough for the markets but more so for the economy- Economic indicators such as Unemployment, CPI, ISM index, Capital expenditure (Non Government) all don’t seem going in the expected direction.
What can it do?
Options
Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed - means that Treasury will issue more Treasury notes and the Fed will use the extra liquidity in the market
issuing debt under the Fed's name rather than the Treasury's - Fed directly borrowing debt and using it to inject liquidity
asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011. - directly inject liquidity
• The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more.
• The News: The Fed is considering several contingency plans for getting more lending capacity so that won't happen.
• The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies.
Pasted from <http://online.wsj.com/article/SB120768896446099091.html?mod=hps_us_whats_news>
Fed's Balance Sheet - June 21, 2007
ASSETS:
Gold certificate account
11,037
Special drawing rights certificate acct.
2,200
Coin
932
Securities, repos and loans
812,372
Securities held outright
790,439
U.S. Treasury
790,439
Bills
277,019
Notes and bonds
513,420
Repurchase agreements
21,000
Loans
933
Items in process of collection
4,524
Bank premises
2,036
Other assets
37,767
Total Assets
870,868
LIABILITIES:
Federal Reserve notes outstanding
976,167
Less: notes held by F.R. Banks
202,531
Federal Reserve notes, net
773,636
Reverse repurchase agreements
30,443
Deposits
22,478
Depository institutions
16,138
U.S. Treasury, general account
6,022
Foreign official
96
Other
222
Deferred availability cash items
5,159
Other liabilities and accrued
dividends
6,042
Total liabilities
837,758
CAPITAL (AKA Net Equity)
Capital paid in
16,106
Surplus
15,387
Other capital
1,617
Total capital
33,110
Analyzing the Federal Reserve's Balance Sheet reveals a number of facts:
The Fed has over $11 billion in gold which is a holdover from the days the government used to back US Notes and Federal Reserve Notes with gold.[citation needed]
The Fed holds almost a billion dollars in coinage not as a liability but as an asset. The Treasury Department is actually in charge of creating coins and US Notes. The Fed then buys coinage from the Treasury by increasing the liability assigned to the Treasury's account.[citation needed]
The Fed holds $790 billion of the national debt.
The Fed has about $21 billion in assets from Overnight Repurchase agreements. Repurchase agreements are the primary asset of choice for the Fed in dealing in the Open Market. Repo assets are bought by creating 'Depository institution' liabilities and directed to the bank the Primary Dealer uses when they sell into the Open Market.[citation needed]
The $976 billion in Federal Reserve Note liabilities represents the total value of all dollar bills in existence; over $200 billion is held by the Fed (not in circulation); and the "net" figure of $774 billion represents the total face value of Federal Reserve Notes in circulation.[citation needed]
The $16 billion in deposit liabilities of 'Depository institutions' shows that dollar bills are not the only source of government money. Banks can swap 'Deposit Liabilities' of the Fed for 'Federal Reserve Notes' back and forth as needed to match demand from customers, and the Fed can have the 'Bureau of Engraving and Printing' create the paper bills as needed to match demand from banks for paper money. The amount of money printed has no relation to the growth of the monetary base (M0).[citation needed]
The $6 billion in Treasury liabilities shows that the Treasury Department doesn't use a private banker but rather uses the Fed directly (the lone exception to this rule is Treasury Tax and Loan because government worries that pulling too much money out of the private banking system during tax time could be disruptive).[citation needed]
The $96 million Foreign liability represents the amount of foreign central bank deposits with the Federal Reserve.
The $6 billion in 'Other liabilities and accrued dividends' represents partly the amount of money owed so far in the year to private banks as part of the 6% dividend guarantee the Fed grants banks for not loaning out a percentage of their reserves.[citation needed]
Total capital represents the profit the Fed has earned which comes mostly from the assets they purchase with the deposit and note liabilities they create. Excess capital is then turned over to the Treasury Department and Congress to be included into the Federal Budget as "Miscellaneous Revenue".[citation needed]
Pasted from <http://en.wikipedia.org/wiki/Federal_Reserve_System>
http://alephblog.com/wp-content/uploads/2008/03/H41.pdf
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http://alephblog.com/wp-content/uploads/2008/03/H41.pdf
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Let’s start with what hasn’t changed. For the most part, the Fed hasn’t expanded its balance sheet. Total assets are up only 2.5%, or 3.8% annualized. The liability side of the balance sheet has expanded even less — 1.7% or 2.7% annualized. The issuance of Federal Reserve Notes has crept up 0.5%, or 0.7% annualized. For a loosening cycle, this is unusual.
But what has changed? The composition of assets on the balance sheet, and the level Fed net worth.
Treasury bills down $163 billion
Treasury notes and bonds down $18 billion
Repurchase agreements up $82 million
Term Auction Credit up $80 million
Other loans (direct lending to dealers) up $37 million
Fed net worth up $7 billion (21%, I will not annualize that)
What you are seeing is a substitution of T-bills and T-notes for short-term lending against collateral with greater credit risk (though with haircuts). If you net all of the changes that I have highlighted on the asset side, it adds up to the change in assets less $3.5 billion. As for the net worth of the Fed, it is curious to see it rising so much. I need to look at that series over time to see how it changes.
In short, the FOMC is providing a little more credit to the economy as a whole through the expansion of its own balance sheet. In the process, it is changing the composition of its own balance sheet (at least for a little while) in order to induce more liquidity into the mortgage markets, while offering out T-bills that are in hot demand. Both aim to narrow the spread between mortgage bonds and Treasuries, particularly on the short end.
That said, the bond market is big, making the $200 billion allocated by the Fed look small. Now, there are also the actions of the GSEs, which are perhaps another $300 billion. Is that enough to right the prime residential mortgage market? It looks small to me, though in the short-run, it can change market psychology.
Why I titled this “Our Not-So-Elastic Currency” is that the amount of stimulus to the economy as a whole is small; the action is focused on fixing the mortgage markets, and the broker-dealers. That M2 and other broader monetary aggregates are rising aggressively stems from a willingness of the banks to take on leverage at present. For banks that are healthy, funds are cheap; they can expand.
TSLF Auction
I had earlier predicted that direct lending to broker-dealers would limit the need for the Term Securities Lending Facility. Well, that’s not true, but the need for the TSLF was not that great today. $75 billion of credit was offered, with only $86 billion of bids. The rate that the exchange of collateral priced at was only 33 basis points, which was only 8 basis points above the minimum acceptable. The auction was close to failing, except that failure would be a good thing. If bids had not been sufficient, it would have indicated a lack of need for the facility, which would indicate that conditions aren’t so bad after all.
My guess is that the TSLF will not be one of the new credit systems that survives the current crisis. The direct lending through the Primary Dealer Credit Facility may prove harder to discontinue because of its greater flexibility.
Pasted from <http://seekingalpha.com/article/70312-changes-in-the-fed-s-balance-sheet?source=side_bar_editors_picks>
Check this out: - http://youtube.com/watch?v=jQD4YXhxa6g&feature=related
Since the Federal Reserve began rolling out ever more creative steps to unfreeze credit markets, it has sold or pledged a growing portion of its portfolio of Treasurys in order to put loans on its balance sheet to banks and securities dealers backed by mortgage-backed securities and other shunned collateral. This has led some observers to worry that if the Fed continues at such a pace, it could run out of ammunition, forcing it to move to quantitative easing – in essence, buying up assets wholesale and allowing the federal funds rate to fall to zero.
But Fed officials believe those fears are misplaced.
First, here’s what the Fed has done (as of April 3):
Lent banks $10.3 billion through the discount window.
Lent banks $100 billion in term auction credit.
Lent securities dealers $76 billion through standard repurchase agreements.
Lent securities dealers $34.4 billion through the discount window.
Lent securities dealers $75 billion of its Treasurys in return for other collateral through its new Term Securities Lending Facility.
Lent up to $36 billion to the European and Swiss central banks.
This still leaves the Fed with about $500 billion in unencumbered Treasury bonds. Some of that is spoken for — the Fed has promised to lend $29 billion to a new entity to take over assets now on the books of Bear Stearns, and up to $125 billion more in its Term Securities Lending Facility. However, anything more such commitments would likely be at least partly offset by reduced borrowing in its other facilities.
All the same, the Fed likes to think of worst-case scenarios and thus has been thinking about ways to expand its ability to lend. In an extreme case it could resort to quantitative easing as the Bank of Japan did from 2001 to 2006, that is buying up large amounts of assets, and letting the fed funds rate fall to zero. But it would rather avoid that. Here are some ways it could expand its lending capacity while maintaining control of the fed funds rate.
The easiest would be to ask Treasury to issue more debt than it needs to fund government operations. As investors pay for the bonds, their cash moves from bank reserve accounts at the Fed to Treasury accounts at the Fed. The Treasury would allow the money to remain there, rather than disbursing it or shifting it to commercial banks who, unlike the Fed, pay interest. Because the shift of cash out of reserve accounts leads to a shortage of reserves, it puts upward pressure on the federal funds rate. To offset that, the Fed would enter the open market and purchase Treasurys (or some other asset), replenishing banks’ reserve accounts. The net result is that the Fed’s assets and liabilities have both grown but reserves and the federal funds rate are unaffected. This wouldn’t cost Treasury anything so long as it doesn’t bump up against the statutory debt limit. The loss of interest on its cash deposits at the Fed would be roughly offset by the additional income the Fed pays Treasury each year from the interest on its bond holdings.
The Fed could issue its own debt or short-term paper. The debt would be an increase in liabilities and it could presumably buy whatever it wanted with the proceeds. Whether the Fed can do so legally is less clear. It previously used the “incidental powers” given it under the Federal Reserve Act to issue options on federal funds around the turn-of-the century date change, and issuing its own debt would likely require invoking the same thing. As one Fed study has noted, use of such power must be “necessary to carry on the business of banking within the limitations prescribed by [the Federal Reserve] Act.”
The Fed could seek to pay interest on reserves. Banks lend out excess reserves at whatever rate they can get because the Fed doesn’t pay interest. That’s one reason the federal funds rate often crashes late in the day, when banks realize they have more reserves than they need. Paying interest on reserves would put a floor under the federal funds rate. The Fed could then make loans and purchase assets with little concern for the impact on the federal funds rate. The Federal Services Regulatory Relief Act of 2006 empowers the Fed to start paying interest at a rate or rates not to exceed the general level of short-term interest rate effective Oct. 1, 2011. The distant date was a result of Congress’ effort to hold down the cost, since payment of interest will cut into how much money the Fed remits to Treasury each year. The Fed could ask Congress to bring that date up to the present. As a general rule the Fed hates to ask Congress for anything for fear of what else Congress might ask for in return. But if the crisis got to the point the Fed felt it really needed this, it’s hard to imagine Congress refusing.
The Fed could try to do the mirror image of the Term Securities Lending Facility. In other words, take the mortgage backed securities pledged to it by dealers in return for Treasurys, and re-pledge them to other dealers, taking Treasurys back. Since the Fed is highly unlikely to fail, dealers might be more comfortable accepting MBS as collateral from the Fed than from other parties. But this might be complicated to do if the MBS are held by a custodial bank as is typical in a triparty repo.
It should be noted that these steps only address the magnitude of the Fed’s lending capacity, not what it does with that capacity. In theory it could simply conduct more of the types of operations it is doing now, or it could get more aggressive, including buying MBS outright, as some on Wall Street have urged it to do. The Fed isn’t closing the door on that but for now doesn’t want to go that route. An alternative would be to sell credit default swaps on MBS or other assets. This would take some of the credit risk of MBS onto its balance sheet — and thus encourage private investors to hold them — while not directly expanding its balance sheet. But doing so presents some of the same thorny issues that buying MBS outright does.
Pasted from <http://blogs.wsj.com/economics/2008/04/09/what-could-the-fed-do/?mod=WSJBlog>
