Federal Reserve Watch: Fed Keeps Things Steady

John M. Mason profile picture
John M. Mason


  • The Federal Reserve continues to purchase open-market securities outright as it attempts to support the economic recovery and get inflation moving at a faster rate.
  • Through its actions over the past year, there seems to be plenty of liquidity in the banking sector and in the corporate sector, keeping short-term interest rates low.
  • The government is planning a new round of fiscal stimulus and the Fed has promised to be there to support the program, erring, if in any way, toward monetary ease.

The Federal Reserve continued to buy securities this past week, and the banking system, with JPMorgan Chase & Co. (JPM) and the other big banks providing some pretty good 2020 earnings, appears to be in a very good position.

Reserve balances with Federal Reserve banks, a proxy for excess reserves in the banking system, came in at $3.150 trillion, which is up from the end of last February, when the Fed started pumping reserves into the banking system, by $1,470 trillion.

The banking system has a lot of cash in its vaults. One can note that the U.S. corporate sector is sitting on the largest amount of cash ever. There is plenty of liquidity sitting on balance sheets in the American economy.

In the money market, the effective Federal Funds rate remains at 0.09 percent. The rate ended the year at 0.09 percent.

In the last week of February 2020, the effective Federal Funds rate averaged 1.58 percent. As the Fed flooded the banking system with liquidity, the rate fell to 0.09 percent and remained there the rest of the year.

What About The Term Structure Of Interest Rates?

As has been noted, the bond markets have been reflecting that investors are expecting the rate of inflation to go up in the near term.

At the end of 2020, the inflationary expectations built into the yield on the 10-year U.S. Treasury note was right around 2.00 percent. This past week, inflationary expectations averaged 2.13 percent, indicating that some of the expected rise has found its way into the bond markets.

As far as the term structure of interest rates, the difference between the yield on the 10-year U.S. Treasury note and the 2-year U.S. Treasury note was 0.97 percent. At the end of 2020, the spread was at 0.92 percent, so there has been a slight

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.

Disclosure: I/we 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.

Recommended For You

Comments (6)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.