The Fed’s Balance Sheet

In yesterday’s class, we talked about the Fed Balance Sheet from a post at the Wall Street Journal‘s econ-blog, Real Time Economics. They will be updating it weekly. Here’s a screenshot of the latest version of the sheet:

fed_balancesheet

Now, besides looking extremely pretty (what with the colors and all), there is significance to the fact that the balance sheet is now an object of attention. Prof. James Hamilton of UCSD explains on Econbrowser (another econ-blog):

I would suggest first that the new Fed balance sheet represents a fundamental transformation of the role of the central bank. The whole idea behind open market operations is to make the process of creating new money completely separate from the decision of who receives any fiscal transfers. … The philosophy is that the Fed should base its decisions on economy-wide conditions, and leave it entirely up to the market or fiscal authorities to determine where those funds get allocated.

The philosophy behind the pullulating new Fed facilities is precisely the opposite of that traditional concept. [link]

This means that the old model of open market operations has been suspended, and the Fed has taken on an entirely new, more interactive approach, with the idea that their actions will act as a stimulator to the stagnating liquidity market.

I highly recommend you read and understand Prof. Hamilton’s comment on the new balance sheet.

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