US Fed balance sheet to grow 5% to $2.9 trillion end-2012 - Cleveland Fed study

   The balance sheet of the U.S. Federal Reserve will expand about 5 percent to around $2.9 trillion by the end of 2012 as a result of its latest plan to purchase additional mortgage-backed securities (MBS), according to a study by the Federal Reserve Bank of Cleveland.
    The Federal Reserve's policy-making body, the Federal Open Market Committee (FOMC), decided on Sept. 13 to expand its purchase of assets to strengthen the U.S. economy and improve the jobs market, a move known as QE3 (Quantitative Easing 3).
    The Federal Reserve's balance sheet was just under $900 billion in early 2008 but it has expanded to just over $2.8 trillion currently, following earlier rounds of purchases of assets, such as Treasury bonds, MBSs and other debt issued by government agencies.
    Under the latest asset purchase program, the Federal Reserve will purchase $40 billion of agency MBSs a month. Unlike earlier asset purchase programs, the Federal Reserve did not put a time or size limit on the program, but said it would continue to purchase the securities until the outlook for the labor market improved substantially.

     "Looking ahead to next year, if the Committee continues to purchase MBS to support the economic recovery, the size of the Federal Reserve's balance sheet will likely continue to expand," the authors, Bill Bednar and Todd Clark, wrote in "Balance Sheet Implications of New Fed Policies."
     The Federal Reserve will also continue its current policy of reinvesting proceeds from its current holdings of agency debt and MBSs in new mortgage-backed securities, which means that there would be no reduction in the holdings of MBSs over time.
    "Assuming a constant level of current holdings through the end of the year, the decision to purchase an additional $40 billion each month will expand the Fed's portfolio of MBSs by about $145 billion during that time. This would bring the total value of MBS holdings up to nearly $987 billion, a 17 percent increase from the value in early September," the authors said, adding:
    "Assuming that the level of the other assets on the Fed's balance sheet remain somewhat constant throughout the remainder of the year - a reasonable assumption - the $145 billion in additional mortgage -backed securities should lead to a comparable increase in the size of the balance sheet overall. The resulting size of approximately $2.9 trillion would be about a 5 percent increase from the balance sheet's current level,"
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