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Federal Reserve Watch: Reduction In Securities Held Outright But An Increase In Excess Reserves

John M. Mason profile picture
John M. Mason


  • Federal Reserve officials indicated that they were going to reduce the Fed's portfolio of securities beginning in October, and they did.
  • An increase in commercial bank excess reserves, however, was not expected.
  • Lesson learned: the reduction in the Fed's portfolio of securities is not going to be a straight-forward affair.

Well, the first month of the Federal Reserve’s effort to reduce the size of its balance sheet has been completed. The total amount of securities held outright by the Fed fell by $5.6 billion from September 27, 2017, to November 1, 2017. In the banking week of the month of October, the amount dropped by $5.8 billion, the full amount coming in a decline in US Treasury securities held outright.

In the time between September 27 and November 1, the total of mortgage-backed securities on the Fed’s balance sheet actually rose by $2.4 billion.

Federal Reserve officials are intent on sticking to the schedule of securities reductions announced earlier, which would have meant that in October the amount of securities held outright would drop by $10.0 billion. Of this decline, US Treasury securities would have declined by $6.0 billion and mortgage-backed securities would have declined by $4.0 billion.

As reported in my last Federal Reserve Watch, the actual timing of when the reductions take place will depend upon the schedule of the actual maturity of the securities and the Fed’s efforts to replace some of them. Thus, the figures may deviate from the schedule on a month-to-month basis. The interesting thing is that while Federal Reserve officials oversaw the reduction of the securities portfolio, the “excess reserves” in the banking system, officially titled on the balance sheet as Reserve Balances with Federal Reserve Banks, actually rose by $102.7 billion in the September 27 to November 1 time frame, and increased by $39.9 billion in just the last banking week as the Treasury security account fell.

So, the Fed reduced its portfolio of securities held outright, which reduces excess reserves in the banking system, but saw excess reserves actually increase of the time period.

What’s going on?

Well, the Federal Reserve reduced

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

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