The Pandemic Federal Reserve: The First Two Years

Abstract

Due to the Covid-19 pandemic, developed world governments engaged in unprecedented spending. Federal Reserve securities holdings were an astounding 36.5% of the nation’s Gross Domestic Product after two pandemic years. These tremendous increases in Federal Reserve holdings resulted in bank reserves that exceeded $4 trillion at their peak and even after some reductions still stood at $3.9 trillion after two years of the pandemic. During the Great Recession, bank excess reserves reached $2.6 trillion but inflation remained below 2% through paying interest on bank reserves. But now we have a bank reserve problem that is 25% larger and the question is: can the Federal Reserve set an IOR high enough to stave off an inflationary increase in the money stock? In policy study 2201, Thomas Saving examines how Federal Reserve assets and liabilities have changed during the pandemic; fluctuations in the M2 money supply; as well as the relationship between short rate Treasuries and the IOR.