Friday, July 12, 2013

How the Federal Reserve Just Hid Important Data

One of the most important data points released by the Federal Reserve has been the amount of excess reserves sitting at the Federal Reserve. Prior to Ben Bernanke paying interest on these reserves, they hardly climbed above $1 billion. After Bernanke announced that he would start paying interest on such reserves, they have skyrocketed. They are now nearly at $2 trillion.

Here's a chart from the St Louis Federal Reserve showing what happened:

This is important data because these reserves are sitting at the Fed and not in the economy bidding up goods and service. If banks start pulling this money out of the Fed and making loans with the money, the money supply will explode, as well as price inflation.

This must be watched closely. But notice something about this chart, the chart title says the series is discontinued. Got that? One of the most important data points is no longer reported by the Federal Reserve.

But is the data really no longer reported? Not quite. The Fed just changed the name for the data (and possibly altered its calculation slightly). The Fed is no longer reporting excess reserves, but instead is pretty much reporting the same thing as Balances maintained that exceed the top of the penalty- free band. This is a cute way for the Fed to erase the connection between pre-Bernanke excess reserves, the massive spike in reserves and the current situation. The data was reported in the old format for 54 years, that is since 1959.

You can see what the old format H.3 release was like and the long series of data,  here. Notice the simple clear data with a column marked excess reserves. That data was from last week. Now take a look at the new data being put out under the same H.3 release, here. The excess reserve column is gone and replaced with Balances maintained that exceed the top of the penalty- free band. Notice that the new data point has just one data point, all the historical data about excess reserves is gone from the current release. Poof! Fifty four years of history, that show how Bernanke has created an insane excess reserves problem, is now relegated to the dust bins. From here on out, Balances maintained that exceed the top of the penalty- free band (formerly known as excess reserves) will show a starting number of $1.977 trillion, rather than the decades under $1 billion.



  1. An inquiring mind asks Will excess reserves, now renamed Balances Maintained that exceed the top of the penalty free band, increase or decrease in value?

    John Rubino of Dollar Collapse writes Variable rate world, part 3: This horror show is just the beginning The big banks own a ton of securities that will plunge in value if interest rates rise.

    The Too Big To Fail Banks obtained these “securities” as part of POMO, and as part of QE, which were placed in Excess Reserves with the Fed.

    One thing that might make the Balances Maintained increase in value is more banks transferring their securities to the Fed; yet one thing that will make Balances Maintained decrease in value is the Interest Rate on the US Ten Year Note , ^TNX, soaring in value as bond vigilantes call the Interest Rate higher, and as foreigners sell US securities to support their own currencies.

    As the Interest Rate on the US Ten Year Note, ^TNX, rises, and as the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, steepens, seen in the Steepner ETF, STPP, steepening, then both the Too Big To Fail Banks, RWW, and the Regional Banks, KRE, will be be integrated either by diktat or by legislation, into the Government and be known as “Government Banks” or “Gov Banks” for short. The banks will be part and parcel of government; their purpose will not be lending as it has been known, but rather check cashing, monetary control, and provisioning of diktat by statist public private partnerships, where regional nannycrats exericse oversight of the factors of production, commerce and trade.

  2. Wow, one billion to 2 trillion in the blink of an eye, that's some serious financial blowback! If Bernanke is paying interest on the reserves, where does the penalty come into play, and what is the penalty?

  3. You don't see the bigger picture. The banker's didn't want to hold non-earning assets. They claim it is unfair (the Friedman rule), to impose a tax [sic] (legal or required reserves), on their deposit liabilities. The 2006 FSRR act provides the authority to completely eliminate "reserve requirements, thereby reducing a regulatory burden for all depository institutions."

    The new reserve requirement’s simplification process on 7/11/2103 missed the opportunity to report the volume, turnover, & distribution of an individual CB’s demand deposit balances in their District Reserve Banks (CB system).

    The most glaring error was the failure to disclose (report separately), the volume of pass-thru correspondent balances utilized to satisfy legal reserve maintenance requirements (historically responsible for the pyramiding of reserves). With this change, the Fed’s research staff has obfuscated the salient differences between liquidity (varied by independently owned & managed BHC’s business plans), & required reserves (a Central Bank’s credit control device).

    Since 1942 (until interest on reserves), commercial bank credit creation was a “system” process (our payment & settlement system is significantly interconnected). No bank, or minority group of banks (from an asset standpoint), could expand credit (& the money stock), significantly faster than the majority group were expanding.

    When CBs expand credit, reserves ceased to be “binding” c. 1994. But when the FRB-NY drains reserves, it still induces a system-wide, contraction of bank assets & liabilities. Indeed, all economic downdrafts coincide with a contraction (or deceleration in growth rates), of required reserves (based on transaction deposits 30 days prior), & commercial bank credit (e.g., depending upon FASB off-balance sheet accounting). Note that 93-96% of all demand drafts clear thru transaction based accounts.

    An individual bank needs clearing balances to lend. These are either stored internally as its liquidity reserves, or if a bank’s balance is insufficient, may be bought in the interbank market (shifting the distribution of reserve balances, & tightening any expansion coefficient).

    The BOG’s reconstruction reveals that: “The levels and growth rates of the two series are nearly identical”. I.e., the new figures are skewed more because of the change in lagged applied vault cash (from 2 weeks to 1 week), rather than eliminating contractual clearing balances, as-of-adjustments, or RAM adjustments.

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  5. Interest on Reserves is the new Federal Funds Rate. Banks dont need the Window anymore, they can now lend to themselves. Just so happens to be .25%!!!! This is a very important tool the Fed has to control inflation, they better not overlook this

  6. Email response to this recent change

    Subject: Re: Fw: Excess Reserves!!!!!

    Dear Matthew,

    Please see the source response:

    8. Why is the "excess reserves" series last published in the July 5, 2013, H.3 statistical release not included in the current H.3 statistical release?

    A. The concept of "excess reserves," defined as total reserve balances less reserve balance requirements, no longer aligns with the remuneration structure following phase two of the simplification of reserves administration. The purpose of the H.3 statistical release is to give the public insight into how depository institutions collectively manage their reserves within the current framework for the implementation of monetary policy. Following phase two of the simplification of reserves administration, the Board of Governors determines the interest rate to be paid on "balances maintained to satisfy reserve balance requirements" up to and including the top of the penalty-free band. The Board also separately determines the rate to be paid on "balances maintained that exceed the top of the penalty-free band." For more information, see Regulation D.

    9. How do I get to the historical concept of "excess reserves" using the current H.3 statistical release?

    A. The historical concept of "excess reserves" no longer has the same meaning following phase two of the simplification of reserves administration. Nevertheless, to get at the historical concept of "excess reserves" using the current H.3 statistical release, take "total reserve balances maintained" (table 1, column 4) less "reserve balance requirements" (table 1, column 1). Alternatively, one can view excess as the amount of balances maintained that satisfy the minimum requirements, which can be calculated by taking "total reserve balances maintained" (table 1, column 4) less "bottom of penalty-free band" (table 1, column 3).

    For more information, see

    We have computed the new series as defined by the source in FRED by taking "total reserve balances maintained" (table 1, column 4) less "reserve balance requirements" (table 1, column 1).

    Yvetta Fortova

    ----- Forwarded by Julie L Knoll/STLS/FRS on 07/16/2013 01:19 PM -----

    From: "Matthew DeBow"
    To: ,
    Date: 07/15/2013 09:48 AM
    Subject: Excess Reserves!!!!!

    Why on earth did you guys discontinue "Excess Reserves of Depository Institutions (DISCONTINUED SERIES) (EXCRESNS)"

    Please tell me why this is discontinued?