An Asset-Liability Management Approach to the Federal Reserve Balance Sheet

Hugo De Vere, Srini Ramaswamy and Sam Schulhofer-Wohl

No 2525, Working Papers from Federal Reserve Bank of Dallas

Abstract: The Federal Reserve’s liabilities include a mix of floating-rate instruments, such as reserves, and long-duration, non-interest-bearing instruments, such as currency. We investigate the implications of an asset-liability management approach to choosing assets to back these liabilities, with a focus on matching the duration of assets and liabilities. We study the net income volatility and mark-to-market volatility of several different asset maturity ladders using a Monte Carlo simulation of future interest rate paths. Short-duration ladders minimize net income volatility when paired with floating-rate liabilities but maximize it when paired with currency. Long-duration ladders minimize income volatility when combined with currency and also minimize the volatility of the economic value of assets net of liabilities in that case, but at the expense of higher mark-to-market asset volatility. We discuss why barbells that combine long- and short-duration strategies produce much lower income volatility than ladders of similar average duration, when liabilities have a mix of long and short durations. However, a barbell could be challenging to implement at scale. We find that an ”across-the-curve” strategy of buying securities in proportion to outstanding amounts generates somewhat less income volatility than a laddered portfolio, though still more than the barbell portfolio.

Keywords: Central Bank; Monetary Policy; Federal Reserve Balance Sheet; Asset and Liability Management (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 20
Date: 2025-07-03
New Economics Papers: this item is included in nep-mon
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DOI: 10.24149/wp2525

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