These items, as well as the Federal Reserve’s other liabilities, can be seen in tables 1, 6, and 7 of the H.4.1 statistical release. The expansion of Federal Reserve assets that has resulted from the aggressive response to the current financial crisis has been matched by an expansion of the Federal Reserve’s liabilities, particularly the deposits of depository institutions.

Federal Reserve notes, net of Federal Reserve Bank holdings

Historically, Federal Reserve notes have been the largest liability on the Federal Reserve’s balance sheet. A U.S. depository institution, when it needs more currency to meet its customers’ needs, asks a Reserve Bank to send it more Federal Reserve notes. The Reserve Bank ships the currency to the institution and debits the institution’s Federal Reserve account by the amount shipped.

Thus, an increase in Federal Reserve notes outside of the Reserve Banks is matched, in the first instance, by a reduction in the quantity of reserve balances that banks and other depository institutions hold in their Federal Reserve accounts. Similarly, a depository institution that finds that it has more Federal Reserve notes on hand than it needs to meet its customers’ needs generally returns the extra currency to a Reserve Bank; the Reserve Bank credits the institution’s account so the liability side of the Federal Reserve’s balance sheet shows a reduction in Federal Reserve notes outstanding and a matching increase in reserve balances held by depository institutions.

The quantity of Federal Reserve notes held by the public has grown over time. Absent any additional action by the Federal Reserve, the increase in Federal Reserve notes would reduce the quantity of reserve balances held by depository institutions and push the federal funds rate above the target set by the Federal Asian steering committee (FOMC). To prevent that outcome, the Federal Reserve engages in open market operations to offset the reduction in reserve balances.