Since the British voted to leave the European Union, the Federal Reserve has been very quiet.
In my post of July 8, I described what the Federal Reserve had done to offset the massive flow of funds into the US financial system due to the Brexit vote.
What is remarkable now that we are into the fourth week following Brexit, is how little the Fed has done, in terms of changes in its balance sheet, in these four weeks.
Reserve balances with Federal Reserve banks, a proxy for the excess reserves in the commercial banking system, are basically unchanged from June 22 through July 20. These numbers are from the Federal Reserve's H.4.1 release, Factors Affecting Reserve Balances of Depository Institutions.
Yes, there have been operating changes in some of the line items, but, on-balance, Fed officials have basically balanced everything out, leaving very little change in bank reserve balances.
There has been a very slight rise in the effective Federal Funds rate during this time. For most of this year, the effective Federal Funds rate has averaged around 37 basis points. The average rose to 38 basis points immediately following the Brexit vote and has averaged around 40 basis points ever since.
I know this is not much of a change, but the effective Federal Funds rate has remained so steady throughout the year that this change, being so coordinated with the Brexit vote, should be mentioned.
The reason for emphasizing these figures is that up until the week before the Brexit vote, officials at the Federal Reserve seemed to be laying the ground work for another increase in the policy range the Fed uses to target the Federal Funds rate.
That is, the Fed had been modestly lowering reserve balances with Federal Reserve banks, preparing the banking system for an increase in the policy rate.
The Federal Reserve had done exactly the same thing in the October to December time period as it prepared the banking system for its increase in the policy rate in December.
The interesting thing is that the Fed released reserves after the December increase, moving so as to maintain the effective Federal Funds rate at 37 basis points, almost exactly at the midpoint of the policy range of 25 basis points to 50 basis points.
From December 30, 2015 through March 30, 2016, the Federal Reserve oversaw an increase in reserve balances of just less than $130 billion.
The Fed's move to tighten up on reserves, preparing for an increase in the policy rate this summer resulted in a decline in bank reserves from the latter part of March through the middle of June.
Recently, some Fed officials have begun talking up the possibility that a change in the policy rate could take place later this year.
We will just have to keep watching, as well as listening, to the Fed to see what might happen. There still are so many uncertainties "out there" that it is hard to predict. One is Britain's economy, which seems to be giving off very weak signs.
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