Balance Sheet of the Federal Reserve Banks

In analyzing central banking, we need to describe the consolidated balance sheet of the Federal Reserve System, shown in Table 26-1 on page 546. U.S. government securities (e.g., bonds) make up most of the Fed’s assets, The small items, loans and acceptances, are primarily loans or advances to commercial banks, The interest rate the Fed charges banks for such loans, or “discounts,” is called the discount rate, which is another of the Fed’s tools, There are two unique items among its liabilities: currency and reserves. Federal Reserve cun’enl)’ is the Fed’s principal liability. These represent the coins and paper bills we use every day. The other major liability is bank reserves, which are balances kept on deposit by commercial banks with the Federal Reserve Banks. Take along with the banks’ vault cash, these are the reserves we have been talking about. They provide the basis for multiple deposit creation by the nation’s banking system.

By altering its holding of government securities the Fed can change bank reserves and thereby trigger the sequence of events that ultimately determines the total supply of money

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