Thursday, October 23, 2008

The Federal Reserve and the Banking System--Banking Week ending October 22

At the end of the banking week closing on Wednesday September 3, 2008, Federal Reserve Bank credit amounted to $887.3 billion or roughly $0.9 trillion. At the close of the banking week ending Wednesday October 22 Federal Reserve Bank credit totaled $1,803.3 billion or about $1.8 trillion. The increase in Federal Reserve Bank credit rose 103.2% in seven weeks! These figures are from the Federal Reserve release H.4.1, Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks.

Reserve balances with Federal Reserve Banks on an average daily balance rose from $10.9 billion in the earlier week to $301.3 billion in the week ending Wednesday October 22. The balances were down to $220.8 billion at the close of business on Wednesday October 22.

In terms of total bank reserves, a figure that also includes vault cash used to satisfy reserve requirements, the increase has been massive. Total bank reserves (on a non-seasonally adjusted basis), averaged $44.2 billion during the two weeks ending September 10, 2008. For the two weeks ending September 24, total bank reserves averaged $111.3 billion! And, for the two weeks ending October 22, total bank reserves averaged $327.6 billion! This is a 641.2% rise in a little more than a month.

The Monetary Base also shows substantial increases. (The Monetary Base consists of all things that are bank reserves or could become bank reserves, like the currency component of the money stock.) In the two weeks ending September 10, 2008, the Monetary Base averaged $849.9 billion. This figure rose to $915.1 billion in the two weeks ending September 24 and then climbed to $1,148.6 billion or about 1.15 trillion in the two weeks ending October 22. This is a rise of 35.2% from the earlier date. This rate is lower than the others because much of the monetary base is made up of currency in circulation which does not change as much over time.

The plan of the Federal Reserve is to liquefy world financial markets as much as possible. The Fed is pushing out the liquidity and it seems as if there is they are finally getting some response.

Money stock growth finally seems to be increasing. The M1 measure of the money stock is showing a rise of 13.0% from the 13 weeks ending July 14 to the 13 weeks ending October 13. The primary growth is coming in both the currency component and the demand deposit component of the money stock. As of yet this movement has not translated itself into the M2 measure of the money stock.

These numbers are no guarantee that the Fed’s efforts are gaining some success, but it does present a little bit of hope…and in today’s financial markets we are looking for all the hope we can find!

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