Question

Management of Financial Institutions

The Federal Reserve (Fed) System consists of, a. Board of Governors, b. Federal Reserve Banks and Branches over the country, and c. The Federal Open Market Committee. The Fed has centralized as the U.S. has evolved from a confederation of regional economies to a truly national economy. The 12 Federal Reserve Banks, once largely autonomous in their respective regional districts, remain operationally important but have lost their authority to set monetary policy. They are a minority (5 votes out of 12) on the FOMC, which sets U.S. monetary policy under ultimate control of the Board of Governors.

Answer the following Questions:

1. How has the Federal Reserve’s balance sheet changed since 2008 till 2020?
2. Why have these changes occurred and what are their implications?
3. How can the Federal Reserve govern and monitor policy implications during times of financial crisis?
4. Comment your findings about such changes over the number of years.

Answer 1

1. The balance sheet of the Fed reserve got shrunk from 2008 to 2020 because it no longer purchases the long duration treasury debt and mortgage bond. So, this affects the balance sheet, thus it changed the balance sheet.

2. These changes occurred because there are some fiscal consequences in the balance sheet of the federal reserve. It also affects that there might be net losses in the near coming future. This might also affect the economic expansion of the countries thus affecting the budget balance and outstanding debt of the government.

3. How to govern and monitor the implications:

a. The Federal Reserve should maintain the current level of reserve balances.

b. They can shrink the current balances to the longer-run level balances.