The Central Bank Balance Sheet
The Federal Reserve, aka the central bank of the U.S., has a few tools in its toolbox to keep the money supply and economy under control. One of the most important of these tools is the balance sheet. This is a record of all the assets and liabilities of the Federal Reserve, and it plays a big role in determining the overall money supply in the economy.
Adding & Subtracting Liquidity
The Federal Reserve controls the money supply by buying and selling assets on its balance sheet. When it buys assets, like Treasury securities or mortgage-backed securities, it increases the amount of reserves held by banks, which then leads to an increase in the overall money supply. And when it sells assets, it decreases the amount of reserves held by banks, leading to a decrease in the money supply.In short, the Federal Reserve's balance sheet is a crucial tool for controlling the money supply and managing the economy. By buying and selling assets and using open market operations, the Federal Reserve can influence the amount of reserves held by banks and determine the overall money supply in the economy. If you're curious about how the financial system works and the role of the central bank, it's important to understand the Federal Reserve's use of its balance sheet.