Increase in Fed balance sheet due to QE during COVID-19 2022

The Federal Reserve's balance sheet ballooned following its announcement to carry out quantitative easing to increase the liquidity of U.S. banks. The balance sheet of the Federal Reserve reached around 8.93 trillion U.S. dollars as of June 21, 2022. This measure was taken to increase the money supply and stimulate economic growth in the wake of the damage caused by the COVID-19 pandemic. The Federal Reserve was not the only institution that implemented an expansionary monetary policy in response to the pandemic. For instance, also the European Central Bank expanded its money supply in March 2020, and kept doing so over the following months.

How do central banks increase the amount of money in circulation?

Central banks can increase the money circulating in the economy in many different ways. For instance, they can decrease banks’ reserve requirements to stimulate lending or decrease the interest rates to reduce the cost of borrowing for commercial banks. Alternatively, central banks can engage in open market operations (OMO) and buy securities such as government bonds from commercial banks or institutions. By conducting open market operations, the Federal Reserve expanded its balance sheet by more than eight trillion U.S. dollars between 2007 and 2022. All these measures aim to increase bank loans to entrepreneurs and consumers in order to stimulate employment and economic growth.

Impact of COVID-19 on the U.S. economy

The COVID-19 pandemic had a tremendous impact on national economies worldwide, and the United States was no exception. During the early months of the crisis, many lost their jobs, mostly those in lower income categories. As a consequence, many Americans found it difficult to pay their rent and cover basic household expenses. Furthermore, as of April 2022, most small business owners claimed that the pandemic had a large or moderate negative effect on their business. Overall, the gross domestic product (GDP) of the United States decreased by roughly 2.2 percent in 2020. However, in 2021, it increased by more than ten percent to almost 23 trillion U.S. dollars.