Balance sheet innovation at the Fed

Global central bank balance sheet update—Dec 21

• Pandemic-related asset purchases were front-loaded in 2020, but a large part of the liquidity created was absorbed as government deposits and only released this year;

• Indeed, Fed reserves of USD2.8 trillion have been absorbed by private intermediaries this year, nearly double the USD1.5 trillion in 2020;

• To prevent this impacting money market rates, the Fed expanded the Overnight Reverse Repo (ON RRP) facility for non-bank financial intermediaries this year;

• This innovation might be the lasting legacy at the Fed of the pandemic; ON RRP now absorbs about USD1.5 trillion of money market fund investments.

The pandemic has seen flexible and innovative policymaking across the world, and central bankers have been amongst the most imaginative. For example, the creation of the Pandemic Emergency Purchase Program (PEPP) by the ECB in March 2020, to bypass legal constraints on asset purchases, was crucial to prevent the possible fragmentation of the Eurozone in 2020.

In the United States, innovation on the liability side of the Federal Reserve balance sheet in the past year has been a central part of the policy response during the pandemic. As asset purchases in the United States look set to end, it is useful to recall some of the unique features of Fed balance sheet expansion since 2019—and reflect on what could be the key legacy of the pandemic.