The value of the balance sheet of the Federal Reserve increased significantly overall between 2007 and 2023, with a slight decline towards the end of 2023. At the end of 2007, the Federal Reserve's balance sheet amounted to roughly 0.9 trillion U.S. dollars. As of February 21, 2024, the Federal Reserve had roughly 7.58 trillion U.S. dollars worth of assets. The most dramatic increases took place in 2008 and in the first half of 2020. These can be traced back to two events: the 2008 financial crisis and the COVID-19 pandemic, which both led to negative annual growth of the real gross domestic product (GDP) of the United States. Therefore, the Federal Reserve’s response to these crises was to adopt expansionary monetary policies to stimulate employment and economic growth.
What is an expansionary monetary policy?
Central banks adopt expansionary monetary policies to increase the amount of money circulating in the economy. This end can be achieved in multiple ways. For instance, central banks can decrease the interest rates to reduce the cost of borrowing money for consumers and entrepreneurs. To this end, the Federal Reserve sharply lowered the U.S. federal funds effective rate between February and March 2020. Moreover, central banks can decrease the minimum amount of funds that commercial banks must keep as reserves, allowing them to grant more loans. Finally, they can engage in open market operations (OMO) and buy securities such as government bonds from commercial banks or institutions. As a consequence of the purchase of government bonds from the Federal Reserve, the public debt of the United States increased considerably between 2019 and 2020.
Are expansionary monetary policies always successful?
Expansionary monetary policies are only effective if commercial banks are willing to grant loans and potential borrowers are willing to take the risk. In fact, while central banks can enforce minimum reserve requirements for commercial banks, they cannot enforce a maximum amount. Therefore, expansionary monetary policies could increase the reserves of commercial banks but not the amount of money circulating in the economy. Furthermore, increasing the money supply tends to increase inflation, which destabilizes the economy and erodes purchasing power. For example, following the Federal Reserve's quantitative easing (QE) in 2020, the inflation rate in the United States reached 4.7 percent in 2021, the largest value since 1991.