End of Fed's Balance Sheet Growth Approaching

In what will likely mark the beginning of the end of the Federal Reserve’s balance sheet expansion, the central bank is scheduled to purchase the last installment of its pledged $1.25 trillion in mortgage-backed securities (MBS) next week.

The Fed’s balance sheet has grown from $890 billion in January 2008 to $2.26 trillion in March 2010. Initially, the increase in its balance sheet was due to numerous liquidity programs aimed to address frozen credit markets in the fall of 2008. As the credit markets healed over 2009 allowing the Fed to unwind many of the programs, the outstanding balances of the liquidity programs declined.

As the liquidity crisis passed, the Fed shifted its focus to revive the morbid housing market. The Fed will have purchased all of its $1.25 trillion in MBS by March 31, 2010. As a result, the Fed’s balance sheet is expected to peak later this Spring, as it finalizes and books all of its securities purchases.

Prior to this balance sheet growth, Treasury holdings, used for conducting monetary policy, comprised about 80 percent of its balance sheet. As of March 2010, U.S. Treasury debt, at $776 billion, was 34 percent of the balance sheet, while MBS comprised 52 percent, and liquidity programs were 13 percent, near their January 2008 share of 17 percent yet $141 billion larger in dollar terms.