Description

In this note, I briefly chronicle the evolution of the Fed Balance Sheet from the pre-crisis period to today. The Fed unleashed several short-term lending programs to revive credit markets during the crisis of 2008, and rapidly increased the size of its Balance Sheet. As credit markets recovered, the unwind of these programs has been as dramatic as their build-up, pointing to a rapid increase in liquidity. However, Reserve Balances continue to stay at historically unprecedented levels because of the security buyback programs initiated by the Fed. These balances are likely to remain high for a protracted period of time, and pose inflationary and asset-bubble risks. The Fed, by under-estimating the speed of this recovery in credit markets, may have left itself with too few choices to combat these risks in the future.