The Federal Reserve’s
Balance Sheet and
Monetary Base
Determination
 Balance sheet of either one of the district banks, or the aggregate of all district banks (“The Federal
Reserve Bank”)

The Federal Reserve’s
Balance Sheet
Securities Held Federal Reserve
Discount Loans Notes
Gold Certificates Bank Deposits
SDR Certificates US Treasury
Coin Held by Fed Deposits
Float Foreign and Other
Holdings of Deposits
Foreign Currency
Physical Capital Capital Account

Federal Reserve Assets
 Securities Held -- mostly T-Bills, used for open market operations
 Discount Loans -- loans advanced to banks at the discount rate
 Gold Certificates -- Fed converts gold obtained by US Treasury
 SDR Certificates -- Fed converts
Special Drawing Rights obtained in international trade.

More Fed Assets
 Coin Held by the Fed
 Float -- cash items in the process of collection minus deferred availability cash items (check clearing)
 Holdings of Foreign Currency -used in exchange rate intervention
 Physical Capital

Federal Reserve
Liabilities and Equity
 Federal Reserve Notes
Outstanding -- currency held by the public (C) + vault cash inside banks
 Bank Deposits at the Federal
Reserve -- especially helpful in check clearing

The Monetary Base and the Fed’s Balance Sheet
 Consider the sum of the first two components.
(Federal Reserve Notes Outstanding)
+ (Bank Deposits at the Fed)
= (C + Vault Cash Inside Banks)
+ (Bank Deposits at the Fed)

= (C) + (Vault Cash Inside Banks +
Bank Deposits at the Fed)
= (C) + (R)
= H

The Fed’s Balance Sheet:
Another Representation
Securities Held Currency Held
Discount Loans by the Public (C)
Gold Certificates Bank Reserves (R)
SDR Certificates US Treasury
Coin Held by Fed Deposits
Float Foreign and Other
Holdings of Deposits
Foreign Currency
Physical Capital Capital Account

Still Another Representation
Securities Held Monetary Base (H)
Discount Loans US Treasury
Gold Certificates Deposits
SDR Certificates Foreign and Other
Coin Held by Fed Deposits
Float
Holdings of
Foreign Currency
Physical Capital Capital Account

Other Federal Reserve
Liabilities + Equity
 US Treasury Deposits
 Foreign and Other Deposits -deposits of some foreign governments and central banks, world organizations.
 Capital Accounts (Fed Equity) --
Federal Reserve is a profit maker, but not profit maximizer, allowed an equity-asset ratio of 3%.

The Federal Reserve as a
Check Clearinghouse
 Example -- Suppose you get a check of $100 from your parents, who bank at Citibank (within the
NY district). You deposit it in your checking account (D) at your bank,
Chase, in Syracuse.

Balance Sheet
Description: The Banks
Citibank

R -$100

D -$100
Chase

R +$100

D +$100

Balance Sheet Description:
The Federal Reserve
Federal Reserve Bank of New York

R -$100 (Citibank)

R +$100 (Chase)
Any change in Bank Reserves is noted on the liability side of the
Federal Reserve

Monetary Base
Determination
Identity -Fed’s balance sheet.
Securities Held + Discount Loans + Gold
Certificates + SDR Certificates + Coin
Held by the Fed + Float + Holdings of
Foreign Currency + Physical Capital
= H + US Treasury Deposits + Foreign and Other Deposits + Equity

The Monetary
Base Equation
Solve equation for H.
(Securities Held + Discount Loans + Gold
Certificates + SDR Certificates + Coin
Held by the Fed + Float + Holdings of
Foreign Currency + Physical Capital)
– (US Treasury Deposits + Foreign and
Other Deposits + Equity) = H

Monetary Base -- Sources
 Sources of the Monetary Base --
Items whose increase increases the monetary base.
 Example -- Securities Held
 
H


The
Balance Sheet Description
Fed buys a $100 bond from Chase.
Federal Reserve

Securities +$100

R + $100
Held

H =

C +

R = $0 + $100 = $100

Monetary Base -- Uses
 Uses of the Monetary Base --
Items whose increase decreases the monetary base.
 Example --
US Treasury Deposits
 
H


The
Balance Sheet Description
The Federal Government collects
$100 in taxes (people paying from their checkable deposits at Chase).
Chase

R - $100

D - $100

The Federal Reserve’s
Balance Sheet
Federal Reserve

US Treasury
Deposits + $100

R - $100 (Chase)

H =

C +

R = $0 + -$100
= -$100

Can the Fed Reasonably
Control the Monetary Base?
(Securities Held + Discount Loans + Gold
Certificates + SDR Certificates + Coin
Held by the Fed + Float + Holdings of
Foreign Currency + Physical Capital)
– (US Treasury Deposits + Foreign and
Other Deposits + Equity) = H

Yes -- They Can Reasonably
Control the Monetary Base
 The monetary base has components both controlled by the
Fed and not controlled by the Fed.
 But, Securities Held is the largest component within the equation.
 And, while changes in the other components may be large, they tend to be isolated and fairly predictable.

Sterilization of
Undesired Changes in H
The Federal Reserve can use open market operations to offset undesired changes in the monetary base -sterilization

Sterilization -- An Example
 Suppose that the Federal Reserve wishes to sterilize the decrease in
H due to tax collection.

US Treasury Deposits + $100
 
H -$100 ,

Securities Held + $100
 
H +$100 ,
Net effect:

H = $0 .

Application -- Exchange
Market Intervention
 Suppose that the Federal Reserve is concerned about an excessive downward movement of the US exchange rate. It intervenes by using its holdings of foreign currency to buy dollars (then remove the dollars from the system).

Sterilized Versus
Unsterilized Intervention
 Holdings of Foreign Currency
 
H

 Sterilized Intervention -- Fed performs an open market operation to offset this effect, Securities Held
 
H

 Unsterilized Intervention -- Fed does nothing, allows H to decrease.

Types of Open
Market Operations
 Defensive Open Market Operation
-- Open market operations done to offset an undesired change in the monetary base.
 Dynamic Open Market Operation
-- Open market operations done to initiate monetary policy.