Following the 2007-2009 financial crisis, which component became the largest asset on the Fed's balance sheet?

In the aftermath of the 2007-2009 financial crisis, the Federal Reserve significantly altered its balance sheet strategy to stabilize the financial system and support the economy. Among the assets on its balance sheet, mortgage-backed securities emerged as the largest component.

The Fed engaged in an extensive purchasing program for mortgage-backed securities as part of its broader quantitative easing efforts. This was aimed at lowering long-term interest rates, improving liquidity in the housing market, and supporting the overall economy. By acquiring these securities, the Fed injected liquidity directly into the mortgage market, helping to stabilize home prices and restore confidence among consumers and investors.

While U.S. Treasury securities are typically a significant part of the Fed's assets, during this period, the scale of the Fed's acquisition of mortgage-backed securities — which soared as part of its response to the crisis — surpassed that of Treasury securities. The focus on mortgage-backed securities was crucial as it directly targeted the underlying issues in the housing market that contributed to the financial collapse.

Consequently, the prominence of mortgage-backed securities on the Fed's balance sheet post-crisis reflects a strategic response aimed at addressing specific economic vulnerabilities and fostering recovery in the housing sector.