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Winding Up While Winding Down?

By December 18, 2013CMF Blog

Bernanke and his team have come under scrutiny recently, with mixed feelings from the public about the quantitative easing program (the current round of which is mockingly name “QE-Infinity”), fearing that the economy has only been “juiced” by the growth in the Fed’s balance sheet to $3.8 trillion as of October 30, 2013. While the Fed has been pumping money into the economy via QE, the country’s commercial banks have flown under the radar, with the public not focusing on the fact that they have about $2.4 trillion in cash on deposit with the Fed as of November 30, 2013. If one were to net the cash put into the economy by the Fed with the cash taken out of the economy by the commercial banks, one would see net $1.4 trillion cash added from these two sources.

As the Fed and the markets think about an exit plan for the federal bond buying program, it looks as though there may be a joint policy move to both scale back the bond buying by mid-2014 and reverse the interest policy for commercial banks, so that they are charged interest on excess reserves (IOER) placed at the Fed instead of providing them with interest income on excess reserves. Alan Blinder mentioned the following in regards to this potential combination policy move in the WSJ last week:

  • Less scrutiny (or focus) on the unwinding of the Fed’s bond buying program
  • Increased commercial lending – today, the Fed is paying the banks interest on the excess reserves, so the banks are keeping their excess reserves high. By making the IOER negative, the banks would then have to PAY interest on these reserves, incenting them to move money from the Fed to the general economy
  • The Fed balance sheet would decrease as commercial lending increases
  • If banks continue to place excess reserves at the Fed, Janet Yellen and her team would make money on the interest payments

This actually looks like a good overall policy move; keep an eye out for subtle hints on changes in Fed IOER and QE policy.

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