The Fed’s Ballooning Balance Sheet

With a return to growth for the Irish economy heavily dependent on economic recovery in the world’s major economies, we must hope that the monetary policy actions being taken by the Fed and other leading central banks will be successful.   Unfortunately, it’s a bit hard to judge what’s going on at the moment, particularly at the Fed.  

I’m teaching a module at UCD this semester on central banking.   I last taught the course in Autumn 2007 but already I’m going to have to rip up many of my old lecture notes, so dramatic have been the changes in monetary policy procedures, most notably at the Fed. 

There have been a number of profound changes at the Fed, including a move away from targeting the Federal Funds rate and towards paying interest on reserves.  But the most notable change has been the massive expansion in the size of the Fed’s balance sheet.  The most useful summary of this development that I have found is this recent post by Jim Hamilton.  Commenting on the huge expansion in the Fed’s balance sheet, Hamilton notes “The bottom line is that Bernanke has made a gamble with something approaching 2 trillion.”

One reply on “The Fed’s Ballooning Balance Sheet”

I was amused to see that one side effect of these Fed policy moves is that aggregate M0 is now bigger than M1! (It’s because M0 included bank balances with the Fed, but M1 does not).

I agree that monetary aggregates don’t seem to be as useful as one might hope in analysing recent events.

I’ve been looking at Irish monetary aggregates over recent months to see if they show much evidence of big movements in September or a flowback in October responding to the guarantee.

It is striking that the dramatic events of late September have not left a very prominent track on the monetary aggregates.

Indeed, there was a small increase in Ireland’s contribution to Eurozone M3 to end-September 2008, compared with a fall in the same aggregate the previous year. And Ireland’s M3 contribution fell in October. (Currency holdings were essentially unchanged.)

As far as UK deposits are concerned (remember all the complaints about money flowing to guaranteed Irish banks) there was a fall of about €10 billion in non-eurozone deposits in Irish banks in September, and this was only partly reversed in October.

(The fall was concentrated in the non-clearing domestic banks, but the reversal was in the clearing banks — “is leor nod don eolach”).

Considering that aggregate deposits in the Irish banking system exceed €300 billion, €10 billion is not a huge number. To be sure, we do not have day-by-day figures.

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