Market Minute: The Federal Reserve’s Balance Sheet

Apr 28, 2023 | Market Minute

Transcript:

Hello, I’m Daniel Greulich, Chief Investment Officer at GreenUp Wealth Management. Today, we’ll take a look at the Federal Reserve’s balance sheet and how it impacts inflation.  

The Federal Reserve’s balance sheet is a record of its assets and liabilities, or what it owns, and what it owes. Now the main piece of The Fed’s assets are composed of bonds that are backed by the U.S. Treasury, government agencies, and mortgages.

The Fed can adjust the size of its balance sheet as part of its monetary policy toolkit, with the goal of influencing interest rates and the availability of credit in the banking system.  Now, over the past 15 years the Federal Reserve has been much more active in supporting economic growth in the U.S. 

Especially during the pandemic, The Fed’s balance sheet grew substantially from four trillion dollars at the beginning of 2020 to nine trillion dollars by April of 2021.  This sudden increase is partially responsible for the high inflation we are experiencing today.  

The good news is that the bonds which make up the Federal Reserve’s balance sheet will eventually mature, automatically decreasing the Fed’s deficit and slowly combating inflation. The current strategy is to let this happen at a rate of roughly $95 billion a month.   But until we see a meaningful decrease in the Federal Reserve’s balance sheet, we expect inflation to be persistent and to affect the economy.

Thanks for watching! 

Author

  • Daniel Greulich, CFA, CFP®

    Chief Investment Officer | Wealth Advisor | Ann Arbor, MI -- Daniel leads our Investment Committee and partners with Aaron Kirsch, Chief Client Advocacy Officer to design and implement client portfolios with your advisor. Daniel brings 14 years of practical experience as a trader, financial advisor, and money manager at both large and mid-sized financial services companies to GreenUp Wealth Management. In addition, he holds a CFP® designation and is also a CFA charterholder. This combination of experience and knowledge helps Dan confidently guide his clients through the development, execution and monitoring of their customized financial plans.

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