The market is the Fed

the market is fed

THE US Federal Reserve (Fed) is the central bank of the world’s largest economy and it has, according to its website, five main objectives. Among these objectives are to manage the government’s monetary policy, which includes price stability and interest rates; and promoting the stability of the financial system. The latter was perhaps a result from the global financial crisis (GFC) where the Fed stepped up to rescue several “too-big-to-fail” financial institution.

The economic turmoil that came with the GFC saw central banks around the world taking up additional responsibility as they not only emerged as lender of the last resort but even buyer of the last resort, especially buying up government papers, which indirectly injected liquidity into the financial system and hence the quantitative easing (QE) programmes. Accounting wise, the Fed’s move increases the size of its assets when they buy these government bonds. On the right side of the Fed’s balance sheet, the size of its liabilities is also increased by the same quantum as it provides the liquidity to the institutions or to the sellers of these government bonds.