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In New York Magazine's interview with investor Mike Burry (made famous by The Big Short), he claims Quantitative Easing has left the Federal Reserve with an extraordinarily high leverage ratio:

What makes you most nervous about the future?

Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me.

What are numerator and denominator in that leverage ratio? What are the Fed's options for what to do with all of the assets it has purchased? Is it even clear what it intends to do?

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    $\begingroup$ I'm inclined to close this as any answer would be pure speculation. The Fed doesn't have to do anything at all with the assets on its balance sheet (a leverage ratio is not a particularly meaningful concept when applied to a central bank), and any future actions it takes will be determined by a vote of a future board, so asking what the institution "intends" to do strikes me as odd. The part about the Fed's options is a reasonable question, though, so I'm torn. $\endgroup$
    – dismalscience
    Dec 31, 2015 at 6:09
  • $\begingroup$ Saying "what does it intend to do" sounds like you are trying to read their minds, but hopefully there has been some public statement about their plan that would be good to know. $\endgroup$
    – chicks
    Dec 31, 2015 at 19:11

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The leverage ratio, as always, is a ratio between liabilities and equity. It has really no significance, as the liabilities of the Fed, which are mostly dollars, need not to ever be paid back.

Only in the case of inflation would the Fed need to reduce its balance sheet (i.e., sell the public debt or MBS). Do note that the profit of the Fed goes back to the government, thus the debt that is sitting there is an asset and liability of the government at the same time, canceling out. That is, the net debt decreases as the Fed buys bonds from the market. You may also view it as inflation or a money tax that pays back the debt.

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In regards to the question about the 77:1 ratio, I can't be certain, but some balance sheet information is publicized from the Fed online:

The main balance sheet is down by section six of this form:

http://www.federalreserve.gov/releases/h41/current/h41.htm

The Fed also provides historical reports of why the balance sheet changed:

http://www.federalreserve.gov/monetarypolicy/quarterly-balance-sheet-developments-report.htm

And on the interactive links from: http://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm , they identify some of the key terms.

I'm not seeing the specific 77:1 ratio referenced. The Fed does have equity/capital but historically this has always been small, so for the most part Fed assets are backed by fed liabilities. Equity currently is only 29 billion compared to 4.8 trillion in assets which is typical. Perhaps the 77:1 ratio referred discounted certain types of liabilities or assets?

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