The Fed's balance sheet is a report showing factors supplying reserves into the banking system and factors absorbing (using) reserve funds. Essentially, the balance sheet shows the various Fed programs for injecting liquidity into the economy and how much the Fed has used each for adding or withdrawing reserves. This report is called Factors Affecting Reserve Balances - or the "H.4.1" report using Fed jargon.
This report typically has not garnered much market attention since Fed policy has been tracked through changes in the fed funds target rate. But with the Fed cutting the fed funds rate to essentially zero in December 2008, markets began to look for other ways (other than rate changes) for viewing the progress and impact of quantitative easing - and tracking the Fed's balance sheet became one of numerous methods of seeing how the Fed's further injections of liquidity were filtering through the economy. Also, the detail of the balance sheet can indicate whether institutions using specific programs are improving as suggested by less reliance on Fed loans.
This indicator has had low importance during the Fed's publicly announced interest rate targeting period but has gained a little more stature during quantitative easing since the fed funds rate has been at essentially zero.
Markets focus on weekly changes for factors supplying reserves with the key measure being the change in assets held by the Federal Reserve. Assets that the Fed holds includes diverse items such as gold certificate accounts, U.S. Treasury securities, federal agency debt securities (such as Fannie Mae and Freddie Mac), mortgage-backed securities, central bank liquidity swaps, and others. Changes in assets indicate how much liquidity the Fed is adding or subtracting from the financial system.