The Federal Reserve has engaged in a broad range of activities to try to improve the economy. Under the Federal Reserve Act, the Fed is authorized to extend credit directly to individuals, partnerships, or corporations in times of "unusual and exigent circumstances."
The graphic below provides a breakdown of these holdings, both before and after the financial crisis. It also includes key events related to the Fed’s holdings. Click on the blue dots for more information.
Factors Affecting Federal Reserve Balances
The Fed is trying to stimulate the economy by providing overnight and longer-term loans to financial institutions; increasing currency swaps with foreign central banks; providing liquidity to borrowers and investors through the purchase of commercial paper and other assets; making direct loans to companies to purchase asset-backed securities; and purchasing mortgage-backed securities.
The largest of the new Fed programs include:
The Commercial Paper Funding Facility, created in October 2008, encourages corporate borrowing by buying commercial paper (securities sold by large banks and companies to obtain funds for short-term borrowing needs such as payroll) directly from companies. As of December 31, 2008, this facility has the potential to purchase up to $1.8 trillion.
Mortgage-backed securities: The Fed announced on March 18, 2009, that it has the authority to purchase up to $1.25 trillion in mortgage-backed securities issued by Fannie Mae, Freddie Mac, the Federal Home Loan Banks and Ginnie Mae.
Term Asset-Backed Securities Loan Facility (TALF): On November 25, 2008, the Fed announced that it would commit $200 billion in loans and the Treasury will provide $20 billion in credit protection for the TALF — for companies to support the purchase of asset-backed securities, such as student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration. Each loan has a three year maturity date. In February 2009, the Fed announced that TALF could be expanded up to $1 trillion. On March 23, 2009, the Fed and the Treasury Department announced that TALF would be expanded to include residential and commercial mortgage-backed securities under the newly announced Legacy Securities program — a part of the Public-Private Investment Program.
The Term Auction Facility, created in December 2007, through which the Fed makes loans — whose interest rates are determined by auctions — to banks and other financial institutions in exchange for pledged collateral. The maximum lending amount under this program is $600 billion.
The Money Market Investor Funding Facility, created in October 2008, will buy certificates of deposit and commercial paper from money market mutual funds. This facility has yet to be utilized as of March 2009, but could make purchases up to $540 billion.
These lending facilities have significantly changed the way that the Fed operates. Generally speaking, before the onset of the financial crisis, a typical Fed loan had a term ranging from overnight to 14 days. With the new lending facilities, the terms of loans can be as long as three years.
As the economy improves, the Fed plans to phase out most of the programs used to acquire assets and return to its historical mission of keeping credit flowing between banks by setting the interest rate at which they lend to one another. The size of the Fed is likely to shrink drastically: as of March 26, 2009, it holds assets worth more than $2 trillion; traditionally, it has held about $850 billion. Although the Fed should be able to reduce its holdings of short-term securities quickly, questions have been raised about how quickly the Fed will be able to reduce its portfolio of longer-term securities.
Other key programs include:
- The Term Securities Lending Facility
- Credit extended to AIG
- Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF):
- Primary dealer and other broker credit facility
- Federal agency debt securities
- Net Portfolio holdings of Maiden Lane LLC
- Net portfolio holdings of Maiden Lane II LLC
- Net portfolio holdings of Maiden lane III LLC
- Currency swaps