Wednesday, September 16, 2009

$1 trillion in excess reserves on the horizon!

The Fed's effort to sterilize its expansionary policies is going bye bye. According to the Treasury:
"Treasury currently anticipates that the balance in the Treasury's Supplementary Financing Account will decrease in the coming weeks to $15 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over. This action is being taken to preserve flexibility in the conduct of debt management policy."
On balance September 9, the Fed holds $199,932 million in liabilities to the Treasury under the Supplementary Financing Account, of which $199,932 - $15,000 = $184,932 million will be paid to the Treasury. How much do you wanna bet that the liquidation of the Treasury's account ends up in excess reserves, increasing the balance from $823,201 million on September 9 to $1,008,133 million (yup, that's $trillions).

Rebecca Wilder


  1. Does this mean we get another $800B-1T stimulus to balance out the deflationary pressure, again?

    Or, we could end interest on excess reserves and get the commercial paper market back.

    Let's see, which way would best detoxify the remaining at-risk real estate?

  2. Any idea how soon this will happen, such as what the maturity structure of the debt used for the SFP is?

  3. It wouldn't make sense. They should continue to buy longer dated government securities, & government-backed mortgage securities, to flatten the yield curve and lower long-term interest rates -- in support of the housing market, i.e., delinquencies, foreclosures, resets, refinancin, etc. (already authorized up to $1.25 trillion).

    There is also an economic side benefit: the FED will return +97% of the interest it receives on it's System Open Market Portfolio back to the Treasury.

  4. Hi Flow5, the Fed will not pay back any interest if it takes heavy losses on the assets that it holds.

    Hi Sam, the term structure of the debt is not specified (to my knowledge); but I assume that the maturity is fairly short (about 90 days), as they release a new debt issuance announcement every quarter that includes the $200b financing of the SFA.

    Hi James, It seems to me that these reserves will remain excess until credit worthiness improves and/or demand for credit comes back robustly. It could balance out the deflationary pressures easily, but demand and credit growth must facilitate the lending.

    I do not understand why the Fed initiated IOR last year. I think that it was initially set to start in 2011 - why not wait until then? That's when the open market desk will likely need it! To date, it's just hindered the impact of expansionary monetary policy.


  5. Rebecca, creditworthiness would track productivity if the top 1% would stop regressively skimming. Ending interest on excess reserves would stop hundreds of billions in regressive wealth redistribution. Will FDIC Chair Bair support that as strongly as she is likely to support detoxification of commercial assets?

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  8. You grasp what I don't..."The Fed will not pay back any interest if it takes heavy losses on the assets that it holds"

    Is there a precedent?

    The term "excess reserves" was coined in the 1920's. It's now outdated.

    Excess Reserves are defined as "cash assets" on line 25 of the H.8 release. But now excess reserves are earning assets and from an accounting standpoint should be reported on a separate line/category.

    & excess reserves no longer belong in a bank's primary (liquidity) reserves, but in a bank's secondary (liquidity) reserves.

    On Sept. 9 "cash assets" are reported as $1053.3b on the H.8. Excess Reserves are reported as $890.308 on Sept. 9.

    "Cash assets" on the H.8 are actually 162.992. I.e., excess reserves are only excess if the renumeration rate changes.

  9. data from:
    The WALL STREET JOURNAL- Federal Reserve Monetary Data

  10. Re: Blog List.

    You might want to add:
    Accrued Interest
    He good and writes intermittently.