Question

Discuss how the Fed's balance sheet has changed over time since the crisis of 2007. Briefly explain some of the asset and liability changes

Answer 1

Starting in 2007, the target of federal funds was declined in December 2008 from 5.25% to a range of 0% to 0.25%, and economists term it to be the zero lower bound. The rates by historical standards were kept unusually low for an unusually long time for mitigate the financial crisis effects and its aftermath. Beginning in December 2015, the Fed began increasing the rates of interest. In total, the Fed increased the rates nine times the period from 2015 and 2018, by 0.25 percentage points each time. In light of rise of uncertainty in economy, the Fed then declined the rates of interest in July 2019 by 0.25 percentage points

The balance sheet of Federal Reserve has contracted and expanded over time. During the crisis and subsequent recession, total assets significantly rose in August 2007 from $870 billion to $4.5 trillion in early 2015. Between the period from October 2017 and August 2019, due to the normalization program the total assets declined under $3.8 trillion. Beginning in September 2019, total assets started to rose

The period from 2009 and 2014, there were three rounds of QE by Fed. In October 2014, third round was completed at which point the balance sheet of Fed was $4.5 trillion, nearly five times its precrisis size. After the end of quantitative easing, the Fed until September 2017 maintained the balance sheet at the similar level, when it began to very gradually decline to a more normal size.