An article in the Wall Street Journal in mid-2016 notes the persistence of slow economic growth and very low interest rates seven years after the end of the financial crisis. One consequence was “the persistence of the Fed’s large balance sheet and financial institutions’ desire to store large amounts of reserves at the central bank.”
a. How does a slow U.S. economic growth rate affect the size of the Fed’s balance sheet?
b. Why are banks storing large amounts of reserves with the Fed?
c. Why are bank reserves a liability on the Fed’s balance sheet? Are they also a liability on banks’ balance sheets? Briefly explain.