Following the global crisis in 2008, assets on the Federal Reserve’s balance she
ID: 1196846 • Letter: F
Question
Following the global crisis in 2008, assets on the Federal Reserve’s balance sheet increased dramatically, from approximately $800 billion at the end of 2007 to $3 trillion in 2011. Many of the assets held are longer-term securities acquired through various loan program instituted as a result of the crisis. In this situation, how could reverse-repos (matched sale-purchase transactions) help the Fed reduce its assets held in an orderly fashion, while reducing potential inflationary problems in the future?’
Explanation / Answer
The Fed can engare in reverse repo transactions, which are a form of open market transactions, wherein the Fed sells its securities and the buyer agrees to sell those securities back to Fed on some near-future date. This way Fed decreases the money supply for short term and short term interest rates.