Analysis of the Fed's liabilities
The liabilities of the Federal Reserve include: (1) cash in circulation; (2) reverse repurchase agreements; (3) deposits; (4) funds in transit; (5) capital injections by the Treasury Department of credit facilities; and payable dividends.
Next, let's analyze the main subjects of the Fed's liability side:
1. Cash in circulation
Before the start of QE in 2008, the cash in circulation accounted for about 90% of the total liabilities of the Federal Reserve, and it was the main form of base money. However, after the Fed launched QE, reserves became the main form of base money, and the ratio of currency in circulation to the Fed's base money dropped to 30%.
2. Other deposits of depository institutions (deposit reserves)
Deposit reserves include statutory deposit reserves and excess deposit reserves. After the Fed launched QE in 2008, deposit reserves accounted for about 50% of the Fed's total liabilities and became the main form of base money.
The Federal Reserve announced on March 15, 2020 that it will reduce the statutory deposit reserve ratio to zero starting from March 26, 2020, and cancel the reserve requirement for all depository institutions. Before this move, the reserve requirement ratio for depository institutions' net trading accounts varied according to the amount of depository institutions' net trading accounts (see Figure 12 for details). Net trading accounts of a certain amount, the so-called "reserve exemption amount" (less than $16.9 million), are required to have a zero RRR; net trading account balances above the RRR exemption amount and Not exceeding the prescribed amount, the so-called “low reserve portion” (US$16.9 million to US$127.5 million), has a reserve requirement ratio of 3%. The reserve ratio for net trading account balances above the low reserve portion is 10% (above $127.5 million).
In 2020, after the Federal Reserve announced that the deposit reserve requirement will be reduced to zero, the deposit reserve requirement of the Federal Reserve continues to grow rapidly. On the one hand, this shows that the liquidity in the United States is very abundant; on the other hand, it also reflects the economic uncertainty due to the impact of the epidemic. Depository institutions still need to maintain sufficient reserves to meet liquidity needs.
3. Fiscal deposits
In 2020, due to the Fed launching a new round of unlimited quantitative easing policy, the deposits of the Treasury will surge, and the proportion of the Fed's total liabilities will increase from about 10% in 2019 to about 25% in 2020. However, it has continued to fall since 2021, and its proportion in the Fed's total liabilities has fallen below 10%.
4. Reverse repurchase agreement
The Fed’s reverse repurchase operation is to sell its own assets to lock other deposits of depository institutions in the reverse repurchase tool to achieve the purpose of recovering excess liquidity, usually overnight reverse repurchase. The decline in the scale of reverse repos in 2020 reflects the release of liquidity by the Federal Reserve under the impact of the epidemic. Since mid-March 2021, reverse repurchase has continued to explode, and the Federal Reserve has withdrawn a large amount of liquidity through reverse repurchase operations. This reflects that the Fed's monetary policy direction has been fine-tuned since March 2021.
Federal Reserve Balance Sheet Inquiry Address: https://www.federalreserve.gov/releases/h41/
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