The Fed’s Risky Business Is Worth It
Saving the U.S. economy matters much more than the health of the central bank’s balance sheet.
The Fed’s got this.
Photographer: Alex Wong/Getty Images North AmericaThis is the second of two columns examining the extraordinary actions the Federal Reserve has taken to support the economy during the coronavirus pandemic, and the consequences for the central bank’s financial condition and balance sheet.
The Federal Reserve’s balance sheet is expanding extraordinarily rapidly and by yearend may exceed $10 trillion. This is against a capital base of only about $39 billion, which implies a leverage ratio of more than 250-to-1. What balance-sheet risks is the Fed taking? Could the Fed conceivably become insolvent?
The balance sheet has been growing primarily in three areas. It currently has about $4.2 trillion of Treasuries and $1.9 billion of agency mortgage-backed-securities (MBS), and this is rising by $120 billion a month; about $353 billion in foreign-exchange swaps with overseas central banks; and about $186 billion in special liquidity and lending facilities. The liquidity and lending programs probably will get much larger. They are just starting to ramp up and there is U.S. Treasury support to backstop as much as $4.5 trillion of such assets.