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Assets and liabilities on the Fed’s balance sheet

The gradual build-up of overnight reverse repurchase agreement operations

The Board of Governors reports the consolidated balance sheet of the 12 Federal Reserve Banks in its H.4.1 “Factors Affecting Reserve Balances” release. Table 5 of that release includes the sum of all assets, liabilities, and capital.

Changes in the composition of the Fed’s balance sheet reflect the operations of the Federal Reserve as it conducts monetary policy. The FRED graph above shows two series from that release as well as an indicator of the Fed’s monetary policy:

  • The blue line is the weekly dollar value, as of Wednesday, of the repurchase agreement operations conducted by the Fed. These are assets to the Fed created when it temporarily purchases Treasury securities held by banks.
  • The red line is the weekly dollar value, also as of Wednesday, of the reverse repurchase agreement operations conducted by the Fed. These are liabilities created when it accepts overnight deposits from financial institutions, with a security held as collateral.
  • The third line, in green, is the effective federal funds rate, as reported by the Federal Reserve Bank of New York; the units are percent, which are plotted on the right axis.

The graph shows that the value of the overnight reverse repurchase agreements started to increase almost exactly 1 year before the Federal Open Market Committee (FOMC) started to raise its target range for the federal funds rate on March 17, 2022. That is, financial institutions gradually changed the composition of their own balance sheets by trading increasingly larger amounts of Treasury securities in exchange for earning the overnight reverse repurchase agreements award rate paid by the Fed. Those financial transactions effectively reduced the liquidity of lenders and, by doing so, contributed to higher interest rates for borrowers.

How this graph was created: Search FRED for “Assets: Other: Repurchase Agreements: Wednesday Level.” Click the “Edit Graph” button and use the “Add Line” tab to add the other two series: “Liabilities and Capital: Liabilities: Reverse Repurchase Agreements: Wednesday Level” and “Effective Federal Funds Rate.” Use the “Format” tab to change the Y-axis position of Line 3 from left to right.

Suggested by Diego Mendez-Carbajo.

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