Federal Reserve liabilities
The major items on the liability side of the Federal Reserve balance sheet are Federal Reserve notes (U.S. paper currency) and the deposits that thousands of depository institutions, the U.S. Treasury, and others hold in accounts at the Federal Reserve Banks. These items, as well as the Federal Reserve's other liabilities, can be seen in the H.4.1 statistical release.
Deposits of Depository Institutions
More than 5,000 depository institutions maintain accounts at the Federal Reserve Banks. They hold balances in those accounts to make and receive payments. The total amount of balances in their accounts is shown in the line "Other deposits held by depository institutions" under "Deposits" on the H.4.1 statistical release. These balances are also referred to as "reserves."
The Federal Reserve can change the total amount of reserves available to the banking system through open market operations or its lending programs. As discussed below, transactions with the Treasury can also affect the supply of reserves.
Any increase in Federal Reserve assets, such as from the Federal Reserve's securities purchases or lending operations, increases the level of deposits of depository institutions (or reserves) at Federal Reserve Banks, all else being equal. When the Federal Reserve buys securities, either outright or via a repurchase agreement (repo), the Federal Reserve credits the account of a depository institution (the account of the purchasing institution or that of the purchasing institution's bank). Conversely, the Federal Reserve's sales of securities (including those that occur in reverse repos) decrease the level of deposits of depository institutions as the accounts are debited.
When the Federal Reserve lends, all else being equal, the total amount of deposits of depository institutions increases. For example, when a depository institution borrows from the Federal Reserve, the amount the institution borrows is credited to its Federal Reserve account. When the depository institution repays the Federal Reserve, the process is reversed, and total deposits in depository institutions' accounts at the Reserve Banks decline.
Depository institutions earn interest on the end-of-day balances they hold at the Federal Reserve. Additional information on the payment of interest on reserves is available at www.federalreserve.gov/monetarypolicy/reserve-balances.htm.
Federal Reserve notes, net of Federal Reserve Bank holdings
Historically, Federal Reserve notes were the largest liability on the Federal Reserve's balance sheet but were surpassed by deposits of depository institutions in 2010. When a depository institution that needs more currency to meet its customers' needs asks a Reserve Bank to send it more Federal Reserve notes, it pays for the currency with a debit to its Federal Reserve account. Thus, an increase in Federal Reserve notes outside of the Reserve Banks reduces the quantity of reserve balances that depository institutions hold in their Federal Reserve accounts but leaves total liabilities of the Federal Reserve unchanged, all else being equal. The quantity of Federal Reserve notes held by the public has grown over time with population growth and other factors affecting currency demand. Additional information on currency is available at (www.federalreserve.gov/paymentsystems/coin_about.htm).
Reverse Repurchase Agreements
The Federal Reserve conducts reverse repurchase agreements (reverse repos or RRPs) by selling Treasury securities to counterparties who agree to sell the securities back to the Federal Reserve on a stated future date. Currently, overnight reverse repos are used as a tool to help keep the federal funds rate in the target range established by the FOMC. The Federal Reserve executes reverse repos with primary dealers and other counterparties. More information on reverse repos is available at www.federalreserve.gov/monetarypolicy/overnight-reverse-repurchase-agreements.htm, and additional details and the results of reverse repo operations are available on the FRBNY website at www.newyorkfed.org/markets/omo/dmm/temp.cfm and at www.newyorkfed.org/markets/rrp_counterparties.html.
In addition, the Federal Reserve also conducts overnight reverse repos with foreign official and international institutions, including foreign central banks, that hold dollars in their accounts at the Federal Reserve Bank of New York. These transactions are one of the services that central banks provide one another to facilitate their international operations. Information on reverse repos with foreign official and international accounts is available at www.newyorkfed.org/markets/central-bank-and-international-account-services. Table 1 of the H.4.1 statistical release shows the two types of reverse repos separately; tables 5 and 6 show only the total.
Deposits of the U.S. Treasury
The Federal Reserve is the fiscal agent of the U.S. Treasury. Major outlays of the Treasury are paid from the Treasury's general account at the Federal Reserve.
The Treasury's receipts and expenditures affect not only the balance the Treasury holds at the Federal Reserve, they also affect the balances in the accounts that depository institutions maintain at the Reserve Banks. When the Treasury makes a payment from its general account, funds flow from that account into the account of a depository institution either for that institution or for one of the institution's customers. As a result, a decline in the balances held in the Treasury's general account results in an increase in the deposits of depository institutions, all else being equal. Conversely, funds that flow into the Treasury's account, such as from a tax payment, drain balances from the deposits of depository institutions.
Foreign Official Deposits
U.S. law allows foreign central banks and several international organizations to maintain dollar-denominated deposit accounts at the Federal Reserve. These balances are reported in the line "Foreign official" deposits in the liability sections of the H.4.1 statistical release. An increase in foreign official deposits held at the Federal Reserve generally reflects a net transfer of dollars from depository institutions to the accounts of the foreign central banks and thus a reduction in deposits of depository institutions. Foreign official deposits held at the Federal Reserve are small relative to the overall size of the Federal Reserve's balance sheet.
U.S. law allows a number of government-sponsored enterprises (GSEs) and Designated Financial Market Utilities (DFMUs) to maintain deposit accounts at the Federal Reserve. Like the U.S. Treasury, the GSEs and DFMUs use their accounts to receive and make payments, which include receipts from issuing debt and payments for redeeming maturing debt. An increase in the line "other deposits" typically reflects a transfer of funds from depository institutions to one or more of these institutions; thus, an increase in "other deposits" ordinarily is matched by a reduction in deposits held by depository institutions.