Unprecedented moves by the US Federal Reserve to help combat the global financial crisis have left it facing an unexpected practical problem: finding space for all the extra people it needs to manage its expanded role.

The issue has been particularly critical at the New York Fed – the arm of the central bank which implements its monetary policy.

Now, however, things are rapidly taking shape.

For example, the “Talf 2.0” team – the Fed staffers seeking to revive the still dysfunctional market for securities backed by commercial mortgages through the $1,000bn term asset-backed loan facility (Talf) – are about to move into one of three extra floors the central bank has leased near its main headquarters on Liberty Street, in New York’s financial district.

In the last year, the size of the Fed’s balance sheet has more than doubled to in excess of $2,000bn.

It has also embraced an unprecedented array of new monetary policy tools – from providing overnight funding to a greater range of financial institutions, to propping up commercial paper markets, to lending money to hedge funds to buy securities backed by credit cards.

So far, the Fed has purchased $236.5bn of its planned $300bn in Treasury debt, bought $105bn of the $200bn in mortgage agency securities and $682bn of the $1,250bn in mortgages it intends buying by the end of the year. Before this year, the Fed had never purchased any mortgage debt.

With the expansion of its operations has come a need for more staff, so much so that the New York Fed’s markets group is expected to reach 400 by the end of this year, against 240 at the end of 2007.

“People were doubled up in offices and cubicles were built in corridors,” said Richard Dzina, in charge of markets operations, monitoring and analysis at the Fed.

“The purchase programmes required a big build-out in staff and the bringing in of external expertise.”

The first move to boost staff came last year with a plea to the other 11 banks in the Federal Reserve system to send any spare employees to New York.  The second response was to call on recently-retired employees to return to work.  

The final step has been to go out and hire. This has actually been easier than in recent years because many Wall Street banks have been shedding staff.

That is in stark contrast to the boom years when the Fed, particularly in New York, struggled to hang on to staff, because they were lured to hedge funds or banks by the prospect of higher salaries.

As well as hiring more staff, the Fed has outsourced numerous tasks. It has hired fund managers to handle the complex back-office tasks associated with buying mortgage-backed securities. It has also hired lawyers and numerous other advisers.

Already, proposals by the Obama administration to expand the role of the Fed as a systemic risk regulator have triggered calls in Congress for a curb on the central bank’s powers and more transparency of its operations. The extent of the Fed’s role in financial markets, ranging from US Treasuries to mortgage debt to securities backed by credit cards and other loans, means that it has also become the biggest customer for many banks. There are some concerns that banks are “gaming” the central banks, by taking positions ahead of it when it plans purchases of mortgage debt, for example.

“You can’t rescue the credit system without benefiting some of the people in it,” said Barney Frank, chairman of the House financial services committee, recently. Mr Frank said Congress would be watching. “We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off.”

Any losses the Fed takes as a result of its new role as investor would, of course, play a significant part in the political debate about its future. At the very least, the Fed believes that having its tentacles in so many markets will help determine how financial market rules should be rewritten to avoid the build-up of excessive risks in the future.

“Transacting in markets creates a different level of knowledge than monitoring them.  We know a lot more about commercial paper, asset-backed securities and mortgage-backed securities now,” says Patricia Mosser, senior adviser.

Regardless of the future course of monetary policy, staffing levels at the New York Fed, which employs 3,000 people in total, will be higher than before the crisis.

The introduction of the Talf means there are likely to be about 25 permanent Talf department staff. Even if the Talf programme stops lending money – this is scheduled to stop in December – there will be a need to keep an eye on the credit quality of assets now held as collateral by the Fed, from credit card loans to commercial mortgages. Indeed, tracking new assets could create another wave of work for the Fed, as it seeks to manage credit risk, not its traditional mandate.

Spence Hilton, senior policy adviser at the Fed, says the move into mortgage-backed securities (MBS) requires an analysis of the types of risks that the Fed has taken on and whether it needs to change its procedures accordingly.

“What are the interest rate risks with MBS, the pre-payment risks, what are the logistics necessary to manage these new types of debt? These types of issues will involve extra work for as long as we continue to hold this debt,” he said.