gonegolfin
Member
The Federal Reserve updates its statistical releases each Thursday at 4:30pm EST. These reports contain plenty of useful information to help ascertain what our Central Bank is doing with respect to monetary policy as well as the relative health of our banking system. One of the reports I look at weekly is the H.4.1 Factors Affecting Reserve Balances, which gives you a high level view of the balance sheet of the Federal Reserve. You can find the H.4.1 reports here ... FRB: H.4.1 Release--Factors Affecting Reserve Balances, Release Dates. Meanwhile, the various series of statistical releases and historical data can be found here ... Federal Reserve Board of Governors Statistics: Releases and Historical Data.
I want to briefly focus on the question of whether or not the Fed has been inflating the money supply. No doubt that you have been hearing, since the crisis began, that the Fed is inflating or printing money. The Fed initiated a variety of measures with the intent of aiding financial institutions (not just depository institutions) in the repair of their mangled balanced sheets such that their reserve requirements could be met and they could ultimately effectively lend again. These measures included the typical and well known open market operations, discount window lending (depository institutions), and cuts in the target rate for federal funds. The Fed also created new lending facilities for both depository institutions (TAF) and primary dealers (TSLF, PDCF, 28-day Repo program). The scope and terms of these offerings have changed over the months, most notably the collateral accepted. But it is important to understand that the Fed has mostly been changing the contents of its balance sheet (swapping good debt for bad debt or what you would call taking on credit risk), not increasing reserves in the system. When the Fed did loan out cash (Ex. TAF), it mostly sterilized the liquidity injection by selling treasuries from its portfolio (again, balance sheet manipulation as opposed to an increase in reserves), with the sterilization amount also taking into account the current market federal funds rate in relation to the target rate of interest for federal funds. Thus, the TAF transactions are only inflationary to the extent that funds disbursed by the Fed for collateral exceed the offsetting treasury sales (sterilization) conducted in the Fed permanent open market operations (as well as the treasury securities that are allowed to expire as they mature).
Just this past week, there have been several financial sites using the "Reserve Bank Credit" number as evidence that the Fed is on a money printing binge. But it is the reserve levels that you must examine. Due to the introduction of the $200 billion Treasury Supplemental Financing Program last week, the Fed took a liability side entry on its balance sheet in the amount of $159.806 billion as of Wednesday 9/24. This reflected the treasury debt that was auctioned to the public with the proceeds being deposited with the Fed (The Fed is acting as the principal in this program and not the Treasury's agent). This is not inflationary because purchases were made by investors (via treasury auction) from existing money stock. This accounting maneuver by the Fed allowed it to strengthen the asset side of its balance sheet (treasuries), which had been depleted during this crisis as the Treasury swapped good debt for bad.
Total deposits with federal reserve banks that were not reserves totaled $187.138 billion in the last reporting week. Thus, you also had an asset side entry reflecting these additions, which caused the "Reserve Bank credit" number to swell. This prompted folks to claim that the Fed has the printing presses running at full throttle. Yes, the Fed was expanding its balance sheet, but was not creating new money. This $187.138 billion number represents money on deposit for various accounts (most of the amount is for Treasury accounts). The Treasury does not withdraw money from its accounts, as banks can do with their deposits with the Fed (these bank deposits count as reserves and represent potential new dollars in circulation if withdrawn). Therefore, the funds in these accounts do not represent potential money creation. If you decide to use the "Reserve Bank credit" number to arrive at the reserve levels (since this is the easy way), you must subtract the amounts from these accounts. But many folks did not do that and simply read the "Reserve Bank credit" number.
Once we remove these non-reserve deposits, we arrive at about $1001 billion ($1.001 trillion), which represents the amount of credit in the system. This is radically different than the $1197 billion ($1.197 trillion) number that many in the financial community are reading from the "Reserve Bank credit" line of the recent H.4.1 report. This number should be compared with the $954 billion number of Wednesday (9/17) and $893 billion of (9/10). Note that this number was $894 billion at the beginning of the year. The smaller changes are also confirmed by the increase in the monetary base. The non-seasonal adjusted monetary base on 9/24 was $915 billion, about a $65 billion increase over that of 9/10. So, we did have an increase in the monetary base over the last couple of weeks (about 7%). But the beginning of the year through 9/10 only saw an increase of just over 2%, for the reasons I described earlier.
If you understood very little or none of the above, you simply need to understand that the Fed has expanded the money supply very little until two weeks ago and still just about 6% in the last two weeks (not the 25% that some have claimed). But it is important to keep looking at the numbers for signs that this is changing. One of these signs will be whether investors consume the treasuries that will be auctioned to fund any legislated bailout (since treasury debt was the stated funding mechanism in the Treasury bailout proposal). If investors do not purchase all of the debt required to fund the bailout, the Fed will have no choice but to engage in quantitative easing (money creation).
Brian
I want to briefly focus on the question of whether or not the Fed has been inflating the money supply. No doubt that you have been hearing, since the crisis began, that the Fed is inflating or printing money. The Fed initiated a variety of measures with the intent of aiding financial institutions (not just depository institutions) in the repair of their mangled balanced sheets such that their reserve requirements could be met and they could ultimately effectively lend again. These measures included the typical and well known open market operations, discount window lending (depository institutions), and cuts in the target rate for federal funds. The Fed also created new lending facilities for both depository institutions (TAF) and primary dealers (TSLF, PDCF, 28-day Repo program). The scope and terms of these offerings have changed over the months, most notably the collateral accepted. But it is important to understand that the Fed has mostly been changing the contents of its balance sheet (swapping good debt for bad debt or what you would call taking on credit risk), not increasing reserves in the system. When the Fed did loan out cash (Ex. TAF), it mostly sterilized the liquidity injection by selling treasuries from its portfolio (again, balance sheet manipulation as opposed to an increase in reserves), with the sterilization amount also taking into account the current market federal funds rate in relation to the target rate of interest for federal funds. Thus, the TAF transactions are only inflationary to the extent that funds disbursed by the Fed for collateral exceed the offsetting treasury sales (sterilization) conducted in the Fed permanent open market operations (as well as the treasury securities that are allowed to expire as they mature).
Just this past week, there have been several financial sites using the "Reserve Bank Credit" number as evidence that the Fed is on a money printing binge. But it is the reserve levels that you must examine. Due to the introduction of the $200 billion Treasury Supplemental Financing Program last week, the Fed took a liability side entry on its balance sheet in the amount of $159.806 billion as of Wednesday 9/24. This reflected the treasury debt that was auctioned to the public with the proceeds being deposited with the Fed (The Fed is acting as the principal in this program and not the Treasury's agent). This is not inflationary because purchases were made by investors (via treasury auction) from existing money stock. This accounting maneuver by the Fed allowed it to strengthen the asset side of its balance sheet (treasuries), which had been depleted during this crisis as the Treasury swapped good debt for bad.
Total deposits with federal reserve banks that were not reserves totaled $187.138 billion in the last reporting week. Thus, you also had an asset side entry reflecting these additions, which caused the "Reserve Bank credit" number to swell. This prompted folks to claim that the Fed has the printing presses running at full throttle. Yes, the Fed was expanding its balance sheet, but was not creating new money. This $187.138 billion number represents money on deposit for various accounts (most of the amount is for Treasury accounts). The Treasury does not withdraw money from its accounts, as banks can do with their deposits with the Fed (these bank deposits count as reserves and represent potential new dollars in circulation if withdrawn). Therefore, the funds in these accounts do not represent potential money creation. If you decide to use the "Reserve Bank credit" number to arrive at the reserve levels (since this is the easy way), you must subtract the amounts from these accounts. But many folks did not do that and simply read the "Reserve Bank credit" number.
Once we remove these non-reserve deposits, we arrive at about $1001 billion ($1.001 trillion), which represents the amount of credit in the system. This is radically different than the $1197 billion ($1.197 trillion) number that many in the financial community are reading from the "Reserve Bank credit" line of the recent H.4.1 report. This number should be compared with the $954 billion number of Wednesday (9/17) and $893 billion of (9/10). Note that this number was $894 billion at the beginning of the year. The smaller changes are also confirmed by the increase in the monetary base. The non-seasonal adjusted monetary base on 9/24 was $915 billion, about a $65 billion increase over that of 9/10. So, we did have an increase in the monetary base over the last couple of weeks (about 7%). But the beginning of the year through 9/10 only saw an increase of just over 2%, for the reasons I described earlier.
If you understood very little or none of the above, you simply need to understand that the Fed has expanded the money supply very little until two weeks ago and still just about 6% in the last two weeks (not the 25% that some have claimed). But it is important to keep looking at the numbers for signs that this is changing. One of these signs will be whether investors consume the treasuries that will be auctioned to fund any legislated bailout (since treasury debt was the stated funding mechanism in the Treasury bailout proposal). If investors do not purchase all of the debt required to fund the bailout, the Fed will have no choice but to engage in quantitative easing (money creation).
Brian
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