Since late 2008, when it began the first of several rounds of large-scale asset purchases, aka "Quantitative Easing," the Fed's balance sheet has grown from just $900 billion in assets to more than $4.4 trillion. And although Fed officials promised it would slim down once the economy recovered, our big, fat Fed is as hefty as ever.
Lately, some Fed bank presidents have been
Before the subprime crisis, banks kept very modest reserve balances at the Fed. To meet occasional shortfalls, they borrowed reserves, or "federal funds," overnight from other banks, at the so-called federal (or "fed") funds rate. Monetary policy boiled down to deciding where the fed funds rate had to be if the Fed was to achieve desired levels of inflation and unemployment, and adjusting the supply of bank reserves to make the actual funds rate hit the chosen target.
Because banks, in that pre-crisis set-up, managed with only modest reserves, almost every dollar in bank deposits went to finance bank loans to businesses or consumers, and the Fed's credit footprint was correspondingly small. Total Fed assets were just one-eighth those of all U.S. commercial banks. In other words, the Fed was able to control total credit creation, while letting commercial bankers determine where the credit should go.
During the financial crisis, everything changed, as the Fed stumbled its way into the radically different set-up now in place. Worried, in October 2008, that its emergency lending would push the fed funds rate below target, the Fed started paying banks interest on their excess reserves (IOER) so that the banks would hoard reserves instead of lending them to other banks. Thanks to Quantitative Easing, the banks ended up accumulating $2.7 trillion in excess reserves.