Friday, February 25, 2011

Federal Reserve QE2 Watch: Part 3.3

The Federal Reserve injected $73 billion more reserve balances into the banking system in the banking week ending February 23, 2011.

The Federal Reserve has injected $272 billion into the banking system since the end of last year, since December 29, 2010.

Reserve balances at Federal Reserve Banks totaled $1.290 billion at the close of business on February 23, 2011.

Excess reserves for the banking system averaged almost $1.220 billion for the two weeks ending February 23, 2011.

QE2 rolls on!

And commercial banks still seem to prefer holding onto the cash rather than lending the money out. And, it seems as if a large percentage of the funds being pumped into the banking system are now going to foreign-related financial institutions. (

The major mover of bank reserves is still the Fed’s purchase of US Treasury securities. The Fed added $23 billion more Treasury securities to its portfolio last week. Holdings of Treasury securities are up almost $200 billion since December 29, 2010.

The Treasury still continues to move money around. In the past week it reduced balances it holds in it’s General Account at the Fed by almost $32 billion. (This action puts reserves into the banking system.)

Since December 29, 2010, the Treasury has reduced it’s balances in the General Account by about $66 billion.

Last week the Treasury also reduced the amount of funds it holds in it’s Supplementary Financing Account by another $25 billion. The Treasury reduced these balances by $75 billion since December 29. As the Treasury spends out of these accounts it puts reserves into the banking system. (For more on the Treasury’s Supplementary Financing Account see my post:

As the Treasury has moved funds around since the end of last year it has put more than $140 billion into the banking system that has ended up as reserve balances.

There are three conclusions I have drawn from the financial statistics I have seen:

First, the Fed is scared silly that the smaller banks in the United States (all banks other than the largest 25) will experience a massive series of failures before the FDIC can close a sufficient number of them in an orderly fashion;

Second, the largest 25 banks in the country are having a feast on the low borrowing costs that the Fed is maintaining (the FDIC reported that 95% of all bank profits in the fourth quarter of 2010 went to the largest banks in the United States,;

Third, given the mobility of capital in the world today, the Federal Reserve has become the central bank of the world and is supplying funds for potential bubbles in commodities and natural resources globally.

My question: Is conclusion one above sufficient justification for the resulting consequences of the Fed’s policy as observed in conclusions two and three?

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