February Federal Reserve Report: Money Market Funds Have Risen For 3 Months

by: John M. Mason

Reserve balances with Federal Reserve banks rose by over $136 billion over the past four weeks. Reserve balances with Federal Reserve banks rose by over $210 billion over the past 13 weeks.

QE3 marches on. The net increase in the Fed's holdings of mortgage-backed securities was $39 billion over the past four weeks; the net increase over the past 13 weeks was $114 billion.

Holdings of U.S. Treasury securities increased by $44 billion over the past four weeks; by $65 billion over the past 13 weeks.

Excess reserves at commercial banks have risen by a little more than $100 billion over the past 13 weeks, although they are about the same in the latter part of January as they were in January 2012.

Note, however, that over the past year, the total reserves in the banking system have actually dropped by 0.6 percent.

But the Federal Reserve actions have caused the monetary base to rise, year-over-year, by just under 3.0 percent.

So, all the increase in the monetary base has come from the increase in currency in circulation! Currency in circulation has risen by almost 9.0 percent over the past year.

So the non-commercial bank public is still building up its currency holdings.

As far as the banking system is concerned, people are still moving their funds into demand deposits and larger savings accounts. Demand deposits rose, year-over-year, by a little more than 17 percent, and larger savings accounts increased by almost 11 percent. Small time and savings accounts at commercial banks dropped, year-over-year, by more than 16 percent.

As a consequence, the required reserves of the banking system rose by just about 18 percent, even though the total reserves in the banking system shrank during the same time period.

The money stock measures, M1 and M2, are increasing, but they seem to be increasing more by individuals and businesses moving their funds into "transaction" type balances or short-term savings from other non-bank assets that are not paying much interest.

The most interesting thing to me about the Federal Reserve data is that finally, money funds, retail and institutional money funds have shown some sustained increases.

Retail money funds have been declining for more than five years. It appears that the decline has hit a bottom during the week ending October 22, 2012. Since then, funds at retail money institutions have steadily risen by almost $33 billion through the week ending January 21, 2013.

The same is true of Institutional money funds. The trough in these assets seems to have come in the week ending November 5, 2013. Since then, assets in these funds have increased by $87 billion through the week ending January 21, 2013.

These figures are remarkable, since asset totals in both of these categories have been declining since late 2007!

In fact, it was in these institutions that a large part of the bank "run" took place in August 2007 and following. (See Gary Gorton, "Slapped by the Invisible Hand: The Panic of 2007", Oxford University Press, 2010.)

One could argue that if money is starting to flow back into the money market funds, that the actions of the Federal Reserve might finally be doing what Mr. Bernanke and other Federal Reserve officials are trying to accomplish.

The financial crisis occurred when institutions started moving money out of subprime mortgage securities, money market funds, asset-based securities, and other pooled securitized instruments.

If the Federal Reserve is looking for a reversal of this movement, maybe we are seeing signs that this reversal is taking place. I have written a lot recently about the revival of the mortgage market and the flows of funds into mortgage-backed securities. I wrote last week about the revival in the market for Collateralized Loan Obligations (CLOs). The Financial Times published an article last Thursday about the next generation of Collateralized Debt Obligations (CDOs). And these are not the only things happening in and around the "shadow" banking system.

The thing that was remarkable about the financial collapse in 2007 was that a great deal of it took place "off the page." That is, a large part of the action took place outside the usual institutions that played a role in past banking crises, outside the "usual" banking and financial statistics, and outside the sight of academics, journalists, and other analysts.

If we accept this premise, then the Fed must revive not only the banking system before a stronger recovery takes place, but also other parts of the financial system that are not so obvious to us. I wrote about this last week:

"Does financial stability have to be re-established within the financial community before more robust real economic growth can be achieved?

Apparently, Mr. Bernanke and the Fed see something that is not readily apparent to us. Maybe the only way that they can really explain the complexity of the situation is to focus on their ultimate goal, higher real economic growth and lower unemployment. Maybe that is as clear as they can be at this time."

There is no doubt that QE3 is continuing. The commercial banking system, with the exception of the largest banks, does not seem to be moving forward aggressively. Other than the largest banks, the banking system seems to be caught up in continued liability adjustment because of the changing needs of a consumer sector and a community business sector that is keeping itself very, very liquid. And, many, many of the less than gigantic banks still are not sure about the value of their loan portfolios yet.

But as the statistics reported in this post indicate, the additional liquidity that the Fed is pushing into the financial system does not seem to be altering the balance sheet positions of the less than large commercial banks.

That is why I believe the data we are now receiving on the money market funds are so important. Maybe we are starting to see the liquidity injections of the Fed starting to spread further into the "shadow" banking system. If this is true, then maybe we are one step closer to a return to greater financial stability… and maybe, we are one step closer to more robust economic growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.