1. Economics
September 21, 2017

Timeline: How the Fed built up its $4.2trn balance sheet

The dollar extended gains against most major currencies after the Federal Reserve announced plans to raise rates and unwind its $4.2trn balance sheet last night.

The next rate hike is forecast for December, followed by another three in 2018.

The Bloomberg Dollar Spot Index increased 0.2 percent on the news to the highest in almost three weeks. Meanwhile, the Japanese yen dipped 0.3 percent to 112.58 per dollar, hitting its lowest point in more than two months.

Jasper Lawler, director of research at the London Capital Group, said:

The Federal Reserve’s intention to start shrinking its balance sheet in October and hike interest rates in December was positive for the US dollar.

From October, the US central bank, chaired by Janet Yellen, will throw its crisis-era quantitative easing program into reverse paring back the Fed’s holdings by about $10bn per month initially.

Here’s how it got to where we are now

Feb 2007: Freddie Mac  will no longer buy the most risky subprime mortgages and mortgage-backed securities.
April 2007: Leading subprime mortgage lender, New Century Financial Corp, files for Chapter 11 bankruptcy protection.    
September 2008: Lehman Brothers files for Chapter 11 bankruptcy protection and Bank of America announces plan to buy Merrill Lynch & Co for $50bn.
October 2008: The US introduces the Emergency Economic Stabilisation Act, which creates the $700bn Troubled Asset Relief Program (TARP). The Treasury buys $125bn worth of preferred stock of nine banks in first TARP funding wave.
November 2008: Citigroup and Bank of America are both bailed out again by the US government. The Fed launches the first round of its quantitative easing program
December 2008: The Treasury authorises a TARP loan of up to $13.4bn for GM and $4bn for Chrysler.
February 2009: The Fed, FDIC and other government offices announce plan to “stress test” banks by April 2009.
June 2009: GM Corp and three domestic subsidiaries file to reorganise in bankruptcy.
November 2010: The Fed announces  another bond buying program, the second round of quantitative easing
September 2012: The Fed announces the third and final quantitative easing round of close to $40bn per month in mortgage-backed securities.

Bond-buying programmes to stimulate the economy after the 2007-2009 recession saw the Fed acquire a portfolio of $4.2trn.

Under its former chairman Ben Bernanke, the Fed pursued three rounds of quantitative easing between 2008 and 2014 by purchasing Treasuries and mortgage-backed securities.

During her press conference on Wednesday Yellen said:

The basic message here is US economic performance has been good; the labour market has strengthened substantially. The American people should feel the steps we have taken to normalise monetary policy are ones we feel are well justified, given the very substantial progress we have seen in the economy.

Yellen added that the damage caused by Hurricanes Harvey, Irma and Maria may impact growth in the coming months but will not “materially alter the course of the national economy in the medium term”.

Fed officials are predicting economic growth of 2.4 percent in 2017.

The Dow Jones industrial average closed up 41.79 points at 22,412.59 on Wednesday, while the S&P 500 rose 0.1 percent to 2,508.24, both record highs.

Mekael Teshome, an economist for Pittsburgh-based PNC Financial Services Group, said:

Today’s meeting really was just confirmation of what we already knew. It’s the beginning of the end for these extraordinary measures.

The Fed’s next meeting is scheduled for 31 October.

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