March 19, 2009 / 9:38 PM / 10 years ago

Fed's balance sheet again balloons above $2 trillion

NEW YORK (Reuters) - The Federal Reserve’s aggressive unconventional policy measures to revive dormant credit markets have again pushed the central bank’s balance sheet above $2 trillion, according to data the Fed released on Thursday.

Liabilities on the Fed’s balance sheet rose to $2.050 trillion as of March 18 from $1.882 trillion the previous week. That number is expected to continue rising following a new vow in the Fed’s policy statement this week to spend over $1 trillion more in buying Treasuries and mortgage bonds.

The latest figures also reflected the Fed’s buying of agency-backed mortgage securities, which officials now plan to expand. As of March 18, agency MBS holdings on the Fed’s book surged to $236.49 billion from the prior week’s $68.96 billion.

Analysts hold vastly different views about the Fed’s efforts. Those worried about deflation say the central bank is taking the right approach.

“We view this as a positive step toward easing financial conditions and supporting the eventual stabilization and recovery of the economy,” said Andrew Tilton, economist at Goldman Sachs in New York.

Others, however, say the Fed is walking a dangerous path, and one that will potentially lead to very high inflation down the line.

In part because of the effects of the expansionary policy on the dollar, which posted its worst drop in 20 years after the Fed’s latest announcement, this camp believes the central bank’s medicine will simply make the patient worse.

“Eventually money illusion succumbs to reality, inflation expectations kick up and nobody is going to want hold long term Treasury debt because it is effectively worth nothing,” said Howard Simons, a strategist at Bianco Research in Chicago.

Reflecting increased corporate interest in bonds backed by the Federal Deposit Insurance Corp., the Fed’s commercial paper funding facility declined modestly.

Borrowing at the Fed’s discount window averaged $138.18 billion a day in the latest week, up from $133.12 billion in the previous period.

(Additional reporting by Burton Frierson and Richard Leong)

Reporting by Pedro Nicolaci da Costa

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