Commentators have highlighted the fact that bank excess reserves held on deposit at the Fed — and on which banks are paid interest at 0.25% p.a. — are declining. This would suggest that bank lending is rising, increasing inflationary pressure.
The Fed is well aware of the situation
…and has responded to the recent slow-down by scaling back asset purchases (quantitative easing). They are likely to track the decline of excess reserves to ensure that the impact on the working monetary base (monetary base minus excess reserves) is contained — along with inflationary pressures.
Aren’t excess reserves still increasing y/y, just at a slower pace?
Apologies. My choice of graph is misleading. The commentary was based on weekly excess reserves.
My point being that the Fed are well aware of the situation and are shrinking their balance sheet accordingly.
Colin, you missed the last bit.
‘They are likely to track the decline of excess reserves to ensure that the impact on the working monetary base (monetary base minus excess reserves) is contained — along with inflationary pressures.’
QE has always been about replacing the loss if private sector credit creation and should be symmetric up and down: based on a broad idea of the appropriate range for growth in the aggregates and base.
As long as the public-private adjustments are ‘quid pro quid’ (you read that first here!) we should have the nearest approximation to stability.
If private credit creation is too fast, reverse QE will be needed alongside interest rates. That is in my view the most important lesson of the last ten years.
Graham Cox
“If private credit creation is too fast, reverse QE will be needed alongside interest rates. That is in my view the most important lesson of the last ten years. ”
Agreed. Keeping overall private credit growth in line with targeted nominal GDP growth (real GDP growth + low rate of inflation) is important for stability. Public credit is the counter-balance. Capital account flows (international credit) also need to be brought under control as they bedevil both monetary policy and the exchange rate.
NO its being used to manipulate the USD on a short term basis.