Monday, May 9, 2011

Federal Reserve QE2 Watch: Part 6

The Federal Reserve continues to pursue its Quantitative Easing 2 exercise.  Over the four-week period ending May 4, 2011, the Federal Reserve purchased $84 billion of U. S. Treasury securities.  About $18 billion of the acquisitions went to offset mortgage-backed securities and Federal Agency issues running off.

Since September 1, 2010, the Fed has purchased $656 billion in Treasuries, with $208 billion to offset mortgage-backed and Agency issues maturing.

Mr. Bernanke indicated at the start that the Fed would increase its holdings of the Treasury securities by $600 billion outright and then purchase about $300 billion more Treasury issues to cover the run-off of Agencies and MBS securities. 

In recent weeks, Mr. Bernanke has stated that the Fed will continue QE2 through the end of June.  It seems as if they are right on target 

Reserve balances at the Federal Reserve totaled $1,473 billion on May 4, 2011 up from $1,019 billion on December 29, 2010 and $1,011 billion on September 1, 2010. 

Excess Reserves at commercial banks (from the Fed’s H.3 release) averaged $1,433 for the two weeks ending May 4, 2011 relatively close to the Reserve Balance total. In December 2010 excess reserves averaged $1,007 billion and in August 2010 excess reserves averaged $1,020 billion. 

Cash assets at commercial banks (from the Fed’s H.8 release) averaged about $1,565 billion for the month of April 2011 while the banks averaged $1,043 for the month of December 2010 and $1,185 for the month of August 2010.

Thus, for the commercial banking system, all measures of vault cash and bank deposits at the Federal Reserve and excess reserves are closing aligned. 

The basic result of QE2, therefore, is that the Fed has injected a little more than $450 billion in excess liquidity into the banking system since the beginning of September 2010, most of the injection coming since 2011 began. 

The net effect of this liquidity on the commercial banking system?

The volume of Loans and Leases on the books of commercial banks have declined by about $132 billion from the beginning of September 2010 through the end of April 2011, and have declined by about $78 billion from the beginning of 2011 to the present. 

The volume of Loans and Leases at commercial banks appeared to remain relatively constant throughout the month of April.

This trajectory seemed to be similar for both the largest 25 domestically chartered commercial banks in the United States and the rest of the domestically chartered commercial banks.

Of the cash assets at commercial banks in the United States, Foreign-Related Institutions held about 50 percent of the $1,565 billion cash assets in the banking system in April.  (For my comments on this see 

The Federal Reserve’s QE2 efforts have not stopped the decline in bank lending, and,

About one-half of the excess reserves the Fed has injected into the banking system have gone to foreign-related banking offices.

Good job!

Looking at the money stock measures, the growth in the M1 and M2 money stock continue to rise. 

The year-over-year rate of growth of the M2 measure of the money stock has risen from 3.5 percent in December 2010 to 4.6 percent in March 2011 and 5.1 percent in April.

The year-over-year rate of growth of the M1 measure of the money stock has risen from 8.4 percent in December 2010 to 10.4 percent in March 2011 and 16.6 percent in April. 

How is this growth happening if bank loans are decreasing?

Well, economic units are still getting out of assets that are earning very little interest and are not counted in the two measures of the money stock and placing the assets in accounts or cash that can be spent when needed which are included in these measures of the money stock.  In several previous posts I have taken this as a negative sign, a sign that people want to keep their assets ready for spending because they are without jobs or without sufficient income or see other assets being underwater.  They are keeping assets in transaction accounts so that they can spend the money when needed. 

This movement to assets the economic units can transact with is seen in the increase in the holdings of currency, which has gone from a year-over-year rate of expansion of 6.3 percent in December 2010 to 7.7 percent increase in March 2011 and an 8.2 percent rise in April.

The year-over-year rate of growth of demand deposits has risen from 15.7 percent in December 2010 to 20.9 percent in March to 21.8 percent in April. 

Non-M1 portions of the M2 money stock have hardly increased within this time frame.

So, the Federal Reserve continues to push on a string.  The commercial banks aren’t lending.  Economic units aren’t borrowing.  And these latter economic units continue to move their assets from longer-term, less liquid assets to shorter-term, transaction-type assets. 

The evidence here still indicates that the banking system is not fully engaged in economic recovery and the efforts of the Federal Reserve system have accomplished little more than spur on the “carry” trade in international financial and commodity markets.  And, it also indicates that consumers and small businesses, in aggregate, continue to keep their assets where they can spend them through a period when they cannot meet current spending needs with their incomes and cash flows being weak.    

No comments: