Federal Reserve Watch: Starting As Promised

Sep. 29, 2022 6:54 PM ETSPY, IVV, VOO, VTI, DIA, IWM, QQQ10 Comments
John M. Mason profile picture
John M. Mason


  • So far, the Federal Reserve is doing what it has said it would do.
  • Last week, the Federal Reserve raised its policy rate of interest, as promised.
  • Over the past month or so, the Federal Reserve has seriously moved to reduce the size of its securities portfolio: since March 16, the portfolio is down by $118.1 billion.
  • Liquidity in the commercial banking system is falling.
  • But, keep your eyes open to see just how long the Federal Reserve continues to follow this track.

Federal Reserve Chairman Jerome Powell Holds News Conference On Interest Rates

Alex Wong/Getty Images News

The effective Federal Funds rate jumped to 3.08 percent this week, 75 basis points higher than it had been resting.

Of course, this is due to the Federal Open Market Committee, the policymaking branch of the Federal Reserve System, moving its target rate up by 75 basis points last week.

So, this is what this year looks like in terms of the Fed's policy rate of interest.

Fed Funds Rate

Effective Federal Funds Rate (Federal Reserve)

So the Federal Reserve is doing exactly what it said it was going to do.

Federal Reserve policymakers also said that they were going to begin to reduce the size of their securities portfolio.

It is doing that as well.

Reduction Of The Securities Portfolio

In the latest banking week, the amount of securities held outright by the Fed closed the week on Wednesday, September 28, 2022, at $8,372.4 billion.

The securities portfolio was reduced by $18.8 billion this past banking week.

Since the end of the March 16 banking week, the portfolio is down by $118.1 billion.

March 16 is the day that the FOMC approved the first rise in the Fed's policy rate of interest.

This is what the size of the securities portfolio looks like in a chart.

Federal Reserve Securities Portfolio

Securities Held Outright (Federal Reserve)

Note that from the end of March through June of this year, the securities portfolio remained relatively constant.

However, once the Fed got into June, the Fed seriously began to reduce the size of its securities portfolio. Since June 22, 2022, the securities portfolio has shrunk by $122.1 billion.

Reduction Of Commercial Bank Excess Reserves

The reduction in the Fed's portfolio of securities helps to shrink the amount of liquidity that is present in the commercial banking system.

The amount of Reserve Balances with Federal Reserve Banks, a line item on the Fed's balance sheet (see Fed statistical release H.4.1, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks. The specific chart under review is titled Factors Affecting Reserve Balances of Depository institutions.)

The line item titled Reserve Balances with Federal Reserve Banks can be looked at as a proxy for excess reserves in the commercial banking system.

In general, if "reserve balances" go up, the banking system has more excess reserves on its books. This would indicate a looser monetary system, which generally would result in a lower policy rate of interest.

If "reserve balances" go down, the Fed is usually "tightening up" on monetary policy, liquidity is tightening up, and the policy rate of interest would usually go up.

Here are the results for this year.

Reserve balances remained relatively flat through March into April. Then the "excess reserves" in the banking system really began to decline.

Excess Reserves in the Banking System

Reserve Balances With Federal Reserve Banks (Federal Reserve)

They have continued to decline up to the end of the present banking week.

So, the reduction in the Fed's security portfolio is helping to reduce the liquidity in the banking system and, consequently, supporting the Fed's efforts to raise its policy rate of interest.

The Fed is sticking to its promised policy path.

But, it still has a long way to go.

And, there are many uncertainties and many unknowns ahead.

This is why we must keep our eyes on what the Fed is doing and what they say they are doing.

So far, what the Fed is doing is consistent with what they have been saying.

But, keep your eyes open.

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 stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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