The Federal Reserve continues to pump money into the banking system..
Last week, added another $191.3 billion to its securities account and with all its other accounts now in action, supplied $205.3 billion to the Fed’s asset total.
Reserve balances at Federal Reserve banks, basically the excess reserves of the commercial banking system, rose by $30.1 billion, to bring total excess reserves up to $3.1 trillion.
World financial markets seem to continue to support what the Federal Reserve is doing as the value of the US dollar rose in foreign-exchange markets. On Friday morning, April 24, 2020, the US Dollar Index (DXY) was around 100.35, up from a value of 96.50 at the start of the year.
To purchase one Euro on Friday morning, it cost $1.0800, down from $1.1260 on January 1.
The confidence of the world financial markets, I believe, is very important because of the role played by the US dollar in world markets and the coordination the Federal Reserve is attempting to achieve with central banks around the world.
In this respect, it should be mentioned that the account Central Bank Liquidity Swaps rose by $31.4 billion, which brings the increase in this account since February 26, 2020, the time when the Federal Reserve really seemed to jump into action in the current crisis situation, to almost $410.0 billion.
It should also be mentioned, that this confidence is important because of the role the United States is playing as a “safe haven” for risk averse traders and investors, which has resulted in massive amounts of international funds flowing into the United States during this period of time.
The Federal Reserve actions are helping to keep international financial markets relatively calm, although the volatility in markets has increased substantially over the past three months.
SINCE THE END OF FEBRUARY
I have been working with the date of February 26, 2020 as the tipping point in terms of Federal Reserve actions. February 26 is the end of a banking week, the Fed designates the banking week as going from Thursday through to the next Wednesday. This is because, historically, weekends have tended to be an erratic time for banking settlements so central bank officials designated the banking week to end on Wednesdays because that helps to smooth out the data leaving out the swings in reserves that were experienced over weekends.
In the current situation, the data before February 26 seem to come from a different operating process than the data that followed this date. Therefore, I have used the February 26th date as the real beginning of the Federal Reserve’s action related to the spread of the coronavirus pandemic.
Since February 26, reserve balances at Federal Reserve banks, or, excess reserves, have increased by more than $1.4 trillion. To be more exact, excess reserves have increased by $1,419.9 billion, bringing the excess reserves in the banking system up to $3,100.0 billion…or $3.1 trillion.
Just a note on scale: the increase of excess reserves over this time period was almost twice the size of the Fed’s balance sheet just before the start of the Great Recession. The total increase in the Fed’s assets over this time period was more than $2.4 trillion.
NEW ACCOUNTS AT THE FED
During this time, the Federal Reserve has added many new accounts to respond to specific segments of the money and banking markets. These accounts are open to service the particular needs of primary dealers, money market funds, the needs of the commercial paper markets, and, just this past week, the Small Business Administration’s Paycheck Protection Program.
Since the end of February, these accounts have supplied $91.0 billion in funds.
So far, each account added a relatively large amount to its balance immediately after the introduction of the facility. After this initial rush, the amounts in each account have generally dropped off.
It appears as if there was an initial need that resulted in the Fed creating these accounts, but then things settled down. The important thing, therefore, in moving forward, is that the accounts are available, participants know that the facilities are operational, and so the Fed stands ready and prepared for any further market disturbances that might jolt financial markets and result in a downward market spiral.
GOVERNMENT ACCOUNT
The General Account of the US Treasury, the account that the Treasury Department writes checks on, has increased by $565.4 billion since the end of February.
This account is being built up, for the time being, in preparation for the US government to write checks for individuals and small businesses and others.
It will be interesting to watch this account to see how the federal government manages its fiscal affairs in distributing monies into the economy. This is something I think we need to keep an eye on to see how the payments are actually progressing.
Furthermore, it will be important to see how the Federal Reserve manages its balance sheet in the face of the Treasury Department writing checks. This is where we get into issues relating to credit inflation and the inflating of the money stock, concerns that we will hear more and more about as the government’s fiscal program is executed.
CURRENCY IN CIRCULATION
Currency in circulation has risen by $96.0 billion since February 26. This is money that has gone into the banking system but has then been withdrawn so that people can live and carry on their daily business.
This is a very tough time for a lot of people and a lot of business owners. In good times, people don’t use cash as much as they do in troubled times. So, we are seeing the impact of people being laid off, of businesses closing because of the COVID-19, and of general uncertainty.
This is another area that can be watched for small bits of information about how labor markets and small- and medium-sized businesses are doing. When things pick up and more businesses are re-opened and more workers get back to their jobs, cash should start to flow back into the banking system. Keep your eyes open.
WHERE WE ARE NOW
By most accounts, we are still in the early stages of the pandemic and the economic disruption. The Federal Reserve seems to be doing all it can to prepare for an extended period of stress. So far the markets seem to believe the Fed is doing the right things. Right now, I agree with the markets.
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.
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