The Federal Reserve continues to pump funds into the banking system. Reserve balances at Federal Reserve banks reached $1.3 trillion on March 2, 2011. This is up from $1.1 trillion on
February 2 and up from $1.0 trillion on December 29, 2010.
These balances serve as a relatively good proxy for the excess reserves in the banking system which averaged $1.2 trillion over the two-week period ending February 23, 2011.
As we have reported before, there are two drivers of this increase in bank reserves. The first, connected with the Fed’s program of quantitative easy, is the acquisition of United State Treasury securities.
Over the past four weeks the Federal Reserve has added almost $100 billion to its portfolio of Treasury securities. Only about $18 billion of these purchases were offset by maturing Federal Agency issues and mortgage-backed securities.
Since the end of last year, the Fed has added $220 billion to its Treasury security portfolio. In this case the Fed was replacing a $48 billion decline in the other securities that were maturing.
And, in the past 13-week period, Almost $320 billion were added to the Treasury portfolio, replacing about $80 billion in maturing Agency issues and mortgage-backed securities.
The second driver has been the action surrounding Treasury deposits with Federal Reserve banks. Since these deposits are a liability of the Fed, a reduction in these deposits increases reserves in the banking system. There are two important accounts here, the Treasury’s General Account and the Treasury’s Supplementary Financing Account.
The Supplementary Financing Account has been used for monetary purposes and in the current case, the Treasury has reduced the funds in this account by $100 billion. All of this reduction came in February.
The Treasury’s General Account is used in conjunction with Treasury Tax and Loan accounts at commercial banks and is the account that the Treasury writes checks on. Generally tax monies are collected in the Tax and Loan accounts and then are drawn into the Federal Reserve account as the Treasury wants to write checks. When the Treasury writes a check, it is deposited in commercial banks, so that bank reserves increase.
Over the past four weeks, the Treasury’s General Account has dropped by almost $70 billion. Thus, between this account and the Treasury’s Supplementary Financing Account the Fed has injected almost $170 billion reserves into the banking system in February.
I need to call attention to the fact that funds moving into and out of the General Account can vary substantially. For example, since the end of the year (which includes the February change) this account has only fallen by $39 billion. Over the last 13-week period, the account has actually increased by $4 billion. Tax collections build up toward the end of the year and then are spent during the first quarter of the year preparing for another buildup around April 15, tax collection time.
The bottom line, the Federal Reserve is seeing that plenty of reserves are being put into the banking system. But, the commercial banks seem to be holding onto the reserves rather than lending them out.
Still, the growth rates of both measures of the money stock seem to be accelerating. The year-over-year growth rate of the M1 measure of the money stock was growing by about 5.5% in the third quarter of 2010. The growth rate increased to 7.7% in the fourth quarter and is growing at a 10.2% rate in January 2011.
The M2 measure of the money stock has also accelerated, going from a year-over-year rate of increase of 2.5% in the third quarter to 3.3% in the fourth quarter to 4.3% in January.
On the surface these increases in money stock look encouraging in terms of possible future economic growth. However, we are still seeing the same behavior of individuals and businesses in the most recent period that we have observed over the past two years.
The growth rates of both measures of the money stock still seem to be coming from people that are getting out of short term “investment” vehicles and are placing these funds in demand deposits or other transaction accounts, or in currency.
The first piece of evidence of this relates to the reserves in the banking system. The total reserves in the banking system have remained roughly constant over the past year. Yet, the required reserves of the banking system have increased by 10% year-over-year. This situation could only happen if demand deposit-type of accounts, which require more reserves behind them, were increasing relative to time and savings accounts, which have smaller reserve requirements.
Looking at the individual account items we see that demand deposits at commercial banks rose at a 20% year-over-year rate of growth in January. The non-M1 part of the M2 measure of the money stock rose by only an anemic 3% rate. Thus, the substantial shift in funds from time and savings accounts to transaction accounts continues. There is no indication of a speeding up of money stock growth connected with the reserves that the Fed is injecting into the banking system.
An even more dramatic shift can be seen if we include institutional money funds in the equation and look at what has happened in the banking system over the past nine weeks. The non-M1 portion of M2 increased by $22 billion over this time period. However, funds kept in institutional money funds declined by roughly $40 billion. This means that accounts that Milton Freidman would have labeled “a temporary abode of purchasing power” actually declined by $18 billion since the start of the year.
Demand deposits and other checkable deposits rose by about $21 billion. One could note that currency in the hands of the public also rose by $16 billion.
The public continues to move money from relatively liquid short-term savings vehicles to assets that can be spent by check or cash. This is not the kind of behavior one gets in an economy that is confident and expanding. This behavior can roughly be called “defensive”.
So, another month has gone by. The Fed is aggressively executing its program of quantitative easing. Yet, it still seems to be “pushing on a string.” Why is it I retain the feeling that the Federal Reserve’s effort is just spaghetti tossing, seeing what might stick to the wall?
The longer this policy continues, the less confidence people seem to have in both Ben Bernanke and the Federal Reserve. I shutter to think what Bernanke and the Fed will do to us when the banking system actually does start lending again.
Note that some members of the Fed’s Open Market Committee are suggesting that QE2 end abruptly at the end of June when the current program is slated to expire. (See "Policy Makers Signal Abrupt End to Bond Purchases in June": http://www.bloomberg.com/news/2011-03-04/fed-policy-makers-signal-abrupt-end-to-bond-purchases-in-june.html.)
Does everyone in the Fed seem “tone deaf” to you? They just seem to act on pre-conceived ideas and have no sense or feel of the banking system and financial markets. Another confidence raiser.
Showing posts with label M2. Show all posts
Showing posts with label M2. Show all posts
Friday, March 4, 2011
Thursday, July 9, 2009
Explaining the Drop in the Weekly Money Stock Measures
Thursday afternoon the Wall Street Journal came out with a startling headline: “US M1 Fell $16.2 B In June 29 Week; M2 Fell $36.2 B.” (See http://online.wsj.com/article/BT-CO-20090709-714875.html#mod=rss_Bonds.)
Looking at the H.6 release that comes out at 4:30 PM on Thursday afternoon the Journal reported correctly. The H.6 release is titled Money Stock Measures. The seasonally adjusted M1 money stock measure averaged $1,669.1 billion in the week ending June 22, 2009 and averaged $1,652.9 billion in the week ending June 29, 2009, a drop of $16.2 billion. Please note that in the two weeks previous to June 22, the M1 Money Stock measured $1,630.9 billion and $1,656.5 billion, respectively.
Thus, M1 rose by $7.0 billion in the week ending June 15 and by $26.5 billion in the week ending June 22.
In terms of the seasonally adjusted M2 series, the weekly average for the week ending June 22 was $8,385.4 billion and for the week ending June 29 the M2 Money Stock averaged $8,349.2 billion, indicating a $36.2 billion drop. We can note that for the two previous weeks M2 averaged $8370.0 billion and $8,385.2 billion, respectively.
M2 rose by $15.2 billion in the week ending June 15 and by $0.2 billion in the week ending June 22.
Now let’s see what happened to the non-seasonally adjusted data. The M1 money stock rose $29.5 billion in the week ending June 15, by $52.0 billion in the week ending June 22 and rose another $47.9 billion in the week ending June 29. These figures are significantly different than the seasonally adjusted series.
In terms of M2, this series rose by $16.4 billion in the week ending June 15 but it dropped by $74.4 billion in the week ended June 22 and dropped again by $49.0 billion in the week ending June 29. Again there are serious differences.
There are two points to make here. Formerly the Fed did not put out weekly data on the Money Stock Measures because they jumped around so much. Such volatility can be unnerving to people watching the money stock. Obviously, people at the Wall Street Journal reacted very strongly to the weekly release.
Second, trying to seasonally adjust weekly data is only for the foolhardy or for the very brave. The only conclusion I can draw from the behavior of both the seasonally adjusted series and the non-seasonally adjusted series is that a lot of “stuff” is going on and the seasonal adjustment process is doing very little to capture what is going on. That is, what we are seeing here is white noise!
Is there any clue to what might be happening to banking accounts?
The answer to this is yes, there have been things happening that might help to account for some of the swings and because of the uncertainty of exactly when these things happen from year-to-year their movements can “screw up” the seasonal adjustment of the raw series.
To see what might be happening in the banking system, I go to the Federal Reserve release H.4.1, “Factors Affecting Reserve Balances.” This release also comes out at 4:40 PM on Thursdays. The account I am particularly interested in on the Fed statement is the line item called U. S. Treasury General Account. This is the account that the Treasury Department pulls in tax money from the private sector and then pays it out to the private sector. It is the “transaction” account of the Treasury Department, the one in which the Treasury deposits tax money and the one which the Treasury Department writes checks against.
This account is a “Factor that is absorbing reserves.” That is, when the Treasury draws funds in from the private sector it removes reserves from the banking system. When the Treasury writes checks to the private sector and these balances at the Fed decline, reserves are put back into the banking system.
The Fed and the Treasury work hard to coordinate their actions because they don’t want to incur large swings in the bank reserves. So, what happens is that tax payments and such are kept in the banking system until the Treasury is about to write some checks. When it draws funds from the banks, private deposits go down and the Treasury balances at the Fed go up. When the Treasury turns around and sends out checks to the private sector, bank deposits go up and the Treasury balances at the Fed go down. The Fed then manages bank reserves so that there are few if any dislocations caused in the banking system due to these transaction.
What we have here in June is a buildup in balances at the U. S. Treasury General Account and then a draw down as the Treasury writes out checks. What the Wall Street Journal caught was the building up deposits in the Treasury account. This comes out in the releases up to June 29.
However, we have not yet see the affect of the Treasury checks going out because we don’t have more current data on the Money Stock measures. We do have data for the Treasury’s General Account for the banking weeks ending July 1 and July 8.
And what do we see?
In the banking week ending June 10, the Treasury account averaged $31.4 billion. The next week the account averaged on $42.3 billion, but the account AT THE CLOSE OF BUSINESS on June 17 was a whopping $132.8 billion. Most of the money was drawn from the banking system at the end of the banking week so that the average did not move much.
But, for the banking week ending June 24, the Treasury General Account balance averaged $118.7 billion reflecting the growth in deposits, but the account AT THE CLOSE OF BUSINESS on June 24 stood at $78.8 billion. A lot of money passed though this account in a very few days.
The U. S. Treasury General Account then continued its decline. The average balance for the banking week ending July 1 was $72.0 billion and the average balance for the banking week ended July 8 was $34.2. This latter figure was right at the level of the average balances in the account in the first two weeks of June.
So, as the Wall Street Journal reported, we saw a massive decline in both measures of the Money Stock in the week ending June 29. However, the swings were caused by operational transactions within the government and should be reversed out in the data that are released for the weeks ending July 6 and July 13. But we won’t see those data for another two weeks.
Bottom line: the money stock is not collapsing! Whew!
Looking at the H.6 release that comes out at 4:30 PM on Thursday afternoon the Journal reported correctly. The H.6 release is titled Money Stock Measures. The seasonally adjusted M1 money stock measure averaged $1,669.1 billion in the week ending June 22, 2009 and averaged $1,652.9 billion in the week ending June 29, 2009, a drop of $16.2 billion. Please note that in the two weeks previous to June 22, the M1 Money Stock measured $1,630.9 billion and $1,656.5 billion, respectively.
Thus, M1 rose by $7.0 billion in the week ending June 15 and by $26.5 billion in the week ending June 22.
In terms of the seasonally adjusted M2 series, the weekly average for the week ending June 22 was $8,385.4 billion and for the week ending June 29 the M2 Money Stock averaged $8,349.2 billion, indicating a $36.2 billion drop. We can note that for the two previous weeks M2 averaged $8370.0 billion and $8,385.2 billion, respectively.
M2 rose by $15.2 billion in the week ending June 15 and by $0.2 billion in the week ending June 22.
Now let’s see what happened to the non-seasonally adjusted data. The M1 money stock rose $29.5 billion in the week ending June 15, by $52.0 billion in the week ending June 22 and rose another $47.9 billion in the week ending June 29. These figures are significantly different than the seasonally adjusted series.
In terms of M2, this series rose by $16.4 billion in the week ending June 15 but it dropped by $74.4 billion in the week ended June 22 and dropped again by $49.0 billion in the week ending June 29. Again there are serious differences.
There are two points to make here. Formerly the Fed did not put out weekly data on the Money Stock Measures because they jumped around so much. Such volatility can be unnerving to people watching the money stock. Obviously, people at the Wall Street Journal reacted very strongly to the weekly release.
Second, trying to seasonally adjust weekly data is only for the foolhardy or for the very brave. The only conclusion I can draw from the behavior of both the seasonally adjusted series and the non-seasonally adjusted series is that a lot of “stuff” is going on and the seasonal adjustment process is doing very little to capture what is going on. That is, what we are seeing here is white noise!
Is there any clue to what might be happening to banking accounts?
The answer to this is yes, there have been things happening that might help to account for some of the swings and because of the uncertainty of exactly when these things happen from year-to-year their movements can “screw up” the seasonal adjustment of the raw series.
To see what might be happening in the banking system, I go to the Federal Reserve release H.4.1, “Factors Affecting Reserve Balances.” This release also comes out at 4:40 PM on Thursdays. The account I am particularly interested in on the Fed statement is the line item called U. S. Treasury General Account. This is the account that the Treasury Department pulls in tax money from the private sector and then pays it out to the private sector. It is the “transaction” account of the Treasury Department, the one in which the Treasury deposits tax money and the one which the Treasury Department writes checks against.
This account is a “Factor that is absorbing reserves.” That is, when the Treasury draws funds in from the private sector it removes reserves from the banking system. When the Treasury writes checks to the private sector and these balances at the Fed decline, reserves are put back into the banking system.
The Fed and the Treasury work hard to coordinate their actions because they don’t want to incur large swings in the bank reserves. So, what happens is that tax payments and such are kept in the banking system until the Treasury is about to write some checks. When it draws funds from the banks, private deposits go down and the Treasury balances at the Fed go up. When the Treasury turns around and sends out checks to the private sector, bank deposits go up and the Treasury balances at the Fed go down. The Fed then manages bank reserves so that there are few if any dislocations caused in the banking system due to these transaction.
What we have here in June is a buildup in balances at the U. S. Treasury General Account and then a draw down as the Treasury writes out checks. What the Wall Street Journal caught was the building up deposits in the Treasury account. This comes out in the releases up to June 29.
However, we have not yet see the affect of the Treasury checks going out because we don’t have more current data on the Money Stock measures. We do have data for the Treasury’s General Account for the banking weeks ending July 1 and July 8.
And what do we see?
In the banking week ending June 10, the Treasury account averaged $31.4 billion. The next week the account averaged on $42.3 billion, but the account AT THE CLOSE OF BUSINESS on June 17 was a whopping $132.8 billion. Most of the money was drawn from the banking system at the end of the banking week so that the average did not move much.
But, for the banking week ending June 24, the Treasury General Account balance averaged $118.7 billion reflecting the growth in deposits, but the account AT THE CLOSE OF BUSINESS on June 24 stood at $78.8 billion. A lot of money passed though this account in a very few days.
The U. S. Treasury General Account then continued its decline. The average balance for the banking week ending July 1 was $72.0 billion and the average balance for the banking week ended July 8 was $34.2. This latter figure was right at the level of the average balances in the account in the first two weeks of June.
So, as the Wall Street Journal reported, we saw a massive decline in both measures of the Money Stock in the week ending June 29. However, the swings were caused by operational transactions within the government and should be reversed out in the data that are released for the weeks ending July 6 and July 13. But we won’t see those data for another two weeks.
Bottom line: the money stock is not collapsing! Whew!
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