Fed Worries About Deflation But Pays Banks Billions Not To Lend QE Proceeds!?
By Tyler Durden
Submitted by Chris Hamilton via Hambone's Stuff blog,
In October of 2006, President Bush signed the Financial Services Regulatory Act (FSRA)…the culmination of a five year Congressional effort. Significantly, the Federal Reserve was given authority to pay interest on reserve balances held by depository institutions in Federal Reserve Banks. But not just reserve balances, which were required to be held, but also on excess reserves. Interestingly, excess reserves at the Fed had never been held in significant quantities. Banks saw relatively little reason to put working capital (beyond required levels) at the Fed. Excess reserves (as a % of required reserves) had generally vacillated between 5% to 15% and typically under $2 billion dollars, at any given time.
However, all this changed upon the implementation of FSRA (which was implemented ahead of schedule in conjunction with Secretary Paulson's Emergency Economic Stabilization Act of 2008 or EESA). The EESA was formally proposed Sept 21 of '08 and passed into law by Oct 3. The impact was a shocking increase in excess reserves. The FSRA law supposed intention was, according to the Fed's Oct. 6, 2008 press release…
“The payment of interest on excess reserves will permit the Federal Reserve to expand its balance sheet as necessary to provide the liquidity necessary to support financial stability while implementing the monetary policy that is appropriate in light of the System’s macroeconomic objectives of maximum employment and price stability.”
The implication I took from this very convoluted Fed speak was that absent the Interest on Excess Reserves or IOER…that the Fed was concerned that the banks (by banks I mean Primary Dealer banks that directly buy the Treasury's from the government with the intention of reselling the Treasury's into the market) would actually utilize this money?!? The Fed's intent seems to have been to utilize QE to buy (remove) assets from the banks and then pay the banks not to lend this money, keeping it from entering the economy (chart below). Still, why would banks go along for this mere pittance of a 0.25% (significantly less than the banks were earning) when the funds could earn so much more if allocated? When the largest, most influential / connected banks in the land do something that looks dumb with $2.4 trillion dollars, it's pretty clear something has changed and we (I) simply haven't caught up yet. Was this some fashion of quid pro quo, collusion, or have the rules of capitalism changed?
By September '08 (in expectation of the laws passage), excess reserves had already increased from a couple billion $'s to never seen before level of $59 billion…and up to $800 billion by years end 2008. Of course, today $2.4 trillion in banking excess reserves are paid to sit and do nothing…while the Fed bemoans a lack of inflation?!?
Some Background:
In the US, bank reserves are held as FRB (Federal Reserve Bank) credit in FRB accounts, regardless whether the reserves …read more
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Source: Fed Worries About Deflation But Pays Banks Billions Not To Lend QE Proceeds!?
Posted May 15th, 2016 in Uncategorized.
