The New York Fed: The Federal Reserve's balance sheet is a key tool for monetary policy and financial stability.
The Federal Reserve's balance sheet is a "key tool" for supporting the FOMC's monetary policy objectives and, in "rare circumstances," supporting financial stability, according to an article published by the Federal Reserve Bank of New York on Tuesday. The Federal Reserve primarily sets its monetary policy stance by adjusting the target range for the federal funds rate, but the FOMC has also previously purchased U.S. Treasuries and agency mortgage-backed securities (MBS) to help ease overall financial conditions, especially when interest rates were around zero. Such purchases have also been used to address market dysfunction, such as during the disruption to financial markets in March 2020 due to the COVID-19 pandemic. Christian Cabanilla, Eric LeSueur, and Josh Younger of the Federal Reserve Bank of New York wrote that the FOMC has also directed the Federal Reserve to reduce the size and holdings of its balance sheet to a level "consistent with efficient and effective implementation of monetary policy under an ample reserves regime."
