The U.S. banking system is flush with cash but may have a problem
(Recasts, changes dateline, previous Washington)
By Trevor Hunnicutt
NEW YORK, May 23 (Reuters) - The Federal Reserve wants the
banking system flush with cash to keep the economy humming, but
there may be bottlenecks that undermine the U.S. central bank's
credibility to influence interest rates.
Major U.S. banks stashed $1.2 trillion with the Fed as of
January, even though they estimate they only need $700 billion
in reserves, the central bank said https://www.federalreserve.gov/data/sfos/files/senior-financial-officer-survey-201902.pdf
on Thursday, based on survey data covering much of the market.
Yet specific banks sometimes need more reserves than they
have, pushing them to borrow. Strong demand for that funding
could push the Fed's target federal funds rate up more than it
wants, undermining its credibility.
Big banks required to meet strict liquidity requirements
have been holding more reserves than regional banks that do not,
Fed research https://www.stlouisfed.org/on-the-economy/2019/april/bank-shedding-reserves?
earlier this year has found.
Since the aftermath of the 2008 financial crisis, when it
flooded the banking system with funds, the Fed has controlled
rates primarily by paying banks interest on those funds. In
theory, rates should not trade much below what banks and other
traders can earn risk-free. By controlling short-term rates, the
Fed hopes to influence the broader economy to maximize
employment and keep inflation at its target.
"One of the ways you determine whether there is abundant
reserves is whether changes in supply and demand of reserves
causes the interest rate to vary, and there's some evidence that
we're getting closer to that part where the demand for reserves
is going to be responsive to changes," Boston Fed President Eric
Rosengren told Reuters.
"Once we're worried that we no longer have an abundance of
reserves we will have to actually increase our balance sheet,
and I think, until we get further down the road, we're not going
to know exactly where that is."
After its May meeting, the Fed tweaked the interest on
excess reserves (IOER) for a third time since June 2018 without
changing the fed funds target in a bid to hold down borrowing
rates. The Fed now pays banks 2.35% interest on
Records from that meeting, released on Wednesday, showed
the Fed was concerned that some "banks were operating with
reserve balances closer" to the least amount they reported would
That "may have contributed to somewhat more sustained upward
pressure on the federal funds rate than had been experienced in
recent years around tax-payment dates," the Fed's records
showed. "In addition, some market participants pointed to
heightened demand for federal funds at month end by some banks"
to meet regulatory requirements on liquidity.
In recent weeks, the fed funds rate has edged down to 2.38%
from a high of 2.45%. At all points it has stayed within the
Fed's target range, which is currently 2.25-2.50%.
But further pressure on borrowing costs could force
additional IOER cuts, or even adjusting the Fed's scheduled
timetable for ending the runoff of assets from its balance
In March the Fed announced the runoff would likely end by
September, depending on market conditions, to slow how quickly
reserves would decline.
(Reporting by Trevor Hunnicutt; Additional reporting by Howard
Schneider in Washington and Richard Leong in New York; Graphic
by Richard Leong; Editing by Jennifer Ablan and Lisa Shumaker)
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