Cash assets in the United States banking system rose by $874 billion in the past 52 weeks. This according to the Federal Reserve release H.8, Assets and Liabilities of Commercial Banks in the United States.
Reserve balances at Federal Reserve Banks increased by $881 billion last 52 weeks. This is according to the Federal Reserve release H.4.1, Factors Affecting Reserve Balances.
It looks as if there is a direct flow-through of the Fed's injection of reserves into the banking system and the cash assets that appear on the balance sheets of commercial banks.
The far more interesting thing, however, is that almost 42 percent of this increase in the cash balances on the balance sheets of the "Commercial Banks in the United States" went to "Foreign Related Institutions in the United States" in the past 52 weeks.
Almost 51 percent went to largest twenty-five domestically chartered commercial banks. And the rest went to the "smaller" domestically chartered commercial banks.
Another interesting fact is that of the $363 billion increase in cash assets at these foreign-related institutions in the United States, $273 billion, or, a little more than 75 percent of these funds ended up in the account "Net Due to Related Foreign Offices" of the foreign-related institutions.
In other words, it appears as three dollars of every four dollars the Fed's injections of reserves into the commercial banking system in the last 52 weeks went to the foreign offices of these foreign-related institutions. That is, they went "off shore."
One could say it this way…the Federal Reserve is liquefying the international banking system.
No wonder other central bankers do not want the Federal Reserve to "taper" their purchases of securities…they do not want the Fed to slow down the creation of bank reserves in the international monetary system.
Last week, Raghuram Rajan, the Governor of the Reserve Bank of India, and formerly a professor of finance at the University of Chicago, called the United States selfish for allowing the Federal Reserve System to start slowing down the injection of liquidity into the international banking system.
This is just one response of many coming from the emerging markets as the Federal Reserve began to "taper" its purchases in January and voted to continue to "taper" further in February. Many of the countries making the noise have faced selling of their currencies in the foreign exchange markets. They are running scared and are "pointing the finger" at the United States in an attempt to remove any blame from themselves.
Tyler Cowen, an economist at George Washington University, has suggested in the New York Times on Sunday, that maybe these accusing nations need to look a little more at what they have done in recent years rather than place all the blame on the developed world, especially on the United States.
Even though the emerging nations need to accept a part of the blame for the uncomfortable situation they are now facing, it is true that the "tapering" of the purchase of securities by the Federal Reserve System is going to have an impact on world markets. There is no question that a lot of the reserves the Fed has injected into the monetary system has gone "off shore".
And, although the Fed is slowing down its purchases and not removing reserves absolutely, the effect of a slowdown in purchases can be counted as a "tightening" of monetary policy.
Officials in this Federal Reserve seem to believe in guiding financial markets with what they call "forward guidance." These officials have spoken to the markets and said that short-term interest rates are going to remain very low…close to zero…for the next year or so. Thus, in doing so, they are attempting to influence market expectations.
In a similar way, saying that the Fed will purchase $85 billion in securities every month creates an expectation that the Federal Reserve will do what it said it was going to do. In December, the Open Market Committee of the Board of Governors of the Federal Reserve System voted to reduce the purchases to $75 billion per month.
The Federal Reserve, in January, did what it said it would do.
There is no way, in my mind, that this action on the part of the Fed was a tightening of monetary policy because the market had been expecting the Federal Reserve to purchase $85 billion.
Now, at its January meeting, the Open Market Committee voted to reduce its purchases in February to $65 billion. And, it is believed that the Fed, once again, will do what it says it will do.
Again, expectations of purchases have to be reduced. In my mind, there is no way that one could argue that this is not a tightening of monetary policy.
And, investors…governments in emerging nations…will be impacted by these decisions because earlier expectations are being broken.
We know that people make lots of money betting on Federal Reserve actions. We also know that people can also lose a lot of money when the Federal Reserve changes direction and these people are still acting the way they did when the Fed was moving along what these people previously expected.
The numbers speak out loud and clear…the Federal Reserve is playing a huge role in international banking organizations and international financial markets. Whatever the Fed does in the next year or so is going to have major impacts on investors and governments. It will be good to keep an eye on what we can read from the statistics that will be generated during this time period.