I keep asking myself this question … what is the Federal Reserve seeing that I am not seeing? Maybe they are seeing nothing that I am not seeing but Chairman Bernanke is on the hot seat. As a historian, an economic historian, a historian that is world renown for his studies of the Great Depression, maybe Chairman Bernanke is afraid of some future Milton Friedman who is going to come along and say that the Federal Reserve and the chairman of the Federal Reserve, did not do enough to combat the Great Recession of the 2000s and did not provide enough stimulus in the 2010s to get the economy going again.
Basically, Milton Friedman said of the Federal Reserve during the 1930s that the central bank did not throw enough "stuff" against the wall to lessen the impact of the depression and encourage a subsequent recovery. Well, Mr. Bernanke has seen to it that massive amounts of "stuff" has been thrown against the wall since 2007 to lessen the impact of the recession experienced and continues to throw all the "stuff" he can against the wall to encourage the United States economy to recovery.
There is certainly no finesse or elegance to what Mr. Bernanke is doing. "Stuff" is "stuff" … and it smells … and is sticky … and …
With regards to the third round of quantitative easing, over the past 13 weeks, the Federal Reserve has supplied almost $240.0 billion of reserves to the commercial banking system. Other factors have absorbed $24.0 billion during this time, so that reserve balances with Federal Reserve Banks rose by almost $215 billion.
This total of reserve balances is a rough proxy for the excess reserves that are held by the banking system. Actual excess reserves in the banking system rose by $180 billion during this time period to reach a total of $1,615 billion for the last two weeks in February.
The only other time that excess reserves were this high came in the month of July 2011. Between that date and now, excess reserves have been substantially lower. So, we have more "unused" reserves in the banking system than almost ever!
The injection of these reserves into the banking system seems to have had very little impact on short-term interest rates. The monthly average effective federal funds rate has averaged between 14 basis points and 16 basis points since September. This steadiness has occurred despite massive amounts of Federal Reserve purchases of securities from the open-market.
Since November 28, 2012, thirteen weeks ago, the Fed has added $230.0 billion worth of securities to its portfolio. This is all attributable to the third round of quantitative easing since the securities portfolio of the Federal Reserve has only increased by about $235.0 billion over the past 52 weeks.
And, note -- throughout the year, the effective federal funds rate has remained within the same basic range it is currently trading in, which allows one to assume that the Fed is having very little impact on short-term interest rates in the current environment regardless of whether or not it is adding a lot of securities to its portfolio. Apparently, there are so many excess reserves around that a few or a lot more seem to have very little impact on the effective federal funds rate.
In terms of the purchases, over the past thirteen weeks, the Fed's holdings of mortgage-backed securities rose by a little more than $130.0 billion: the Fed's holdings of U.S. Treasury securities rose by a little more than $100.0 billion. There was a shift, however, in the portfolio over the last year as the holdings of mortgage-backed securities rose by $175.0 billion while the holdings of U.S. Treasury securities rose by a little less than $90.0 billion.
With all this activity going on, the total reserves in the banking system rose very little, slightly over $50 billion (the first increase in a long time) or by about 4.5 percent. Required reserves rose by only about $15 billion, the rest of the increase, of course, went into excess reserves. Over the past year or so, total reserves have been relatively flat as required reserves increased. This, of course, resulted in a decline in excess reserves.
What was happening was that people and businesses were continuing to transfer their funds from interest-bearing assets into transactions accounts. This transfer seemed to be taking place because of the very, very low interest rates but also because so many families and businesses were not doing that well and were moving funds into transactions accounts for spending purposes.
Demand deposits held at commercial banks continue to rise at a quite rapid rate -- 19.0 percent, year-over-year. Time and savings accounts at depository institutions rose, but only by a modest amount.
Thrift institutions continue to be hit hardest by this movement. Whereas savings accounts rose by around 9.0 percent, year-over-year, savings accounts at thrift institutions rose by only 0.3 percent. Small denomination time and savings accounts fell by 17.5 percent while these same accounts at thrift institutions fell by close to 18.0 percent.
Last month, I wrote that it appeared that the tide had reversed for the money market funds and that they had begun to increase again. Retail money market funds rose in October through the middle of January and then began to decline again. Institutional money market funds started to rise in December and have continued to rise through February. We will continue to watch these figures.
So the Fed's quantitative easing continues. And, the wealthy continue to benefit from it. And, Mr. Bernanke seems to be concerned about what history is going to say about his reign at the Fed. Certainly, Mr. Bernanke did not get good marks for the time he spent at the Fed when Alan Greenspan was the Chairman. It seems that Bernanke started at a very early stage of the financial crisis to err on the side of too much ease. I don't ever see him backing off from this.
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