The picture shows the major components of the Fed’s balance sheet in recent years. Some things have remained the same—contrary to the many claims that the Fed has been printing money like crazy in the past few months, the amount of currency in circulation has risen only slightly more than normal. The really big change is the expansion in the Fed’s ownership of assets other than in the traditional form of Treasury securities. The Fed has increased its holdings of non-Treasury assets by about $1.7 trillion. Some of the assets are loans to banks and other financial organizations secured by financial assets and others are direct holdings of financial claims. The Fed has bought up financial assets because investors appeared to be shunning them. The Fed feared the consequences of attempts to sell these assets in markets without buyers who valued them.
The Fed financed these investments by selling about $300 billion of Treasury securities it owned and by borrowing huge amounts from the Treasury (currently about $400 billion in deposits from the Treasury at the Fed) and from banks, in the form of vastly expanded reserves (almost $800 billion at yearend). Reserves are just another form of borrowing at this point and have no special role in the monetary system. The reason that many commentators have mistakenly thought that the Fed was printing money was that reserves used to function like money, under previous monetary institutions.
Federal Reserve Assets and Liabilities.