Sunday, June 21, 2020

On Declining Fed Asset Purchases

Scott Olmsted emails:
A chart at ZeroHedge may be worth a comment.

It shows Fed asset purchases declining, even going negative.

How to reconcile this with your explanations? Perhaps there are many other avenues of money creation. There must be others like me who will puzzle over this.

RW response:

This is just picking a data point without understanding its relation to the big picture.

Fed assets are important but as you surmise there are plenty of other ways for the money supply to increase, especially now since the Fed has lowered the reserve requirement to zero.

That is, in a very important way, Fed assets are much less significant now. Ignoring regulatory capital requirements for a minute, a bank can create any amount of new loans (that is create new money) regardless of the Fed reserves it has.

From the Federal Reserve:
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020.  This action eliminated reserve requirements for all depository institutions.
 The only thing holding banks back now is regulatory capital requirements, not reserves at the Fed.

Further, you really shouldn't look at just one week or a couple of weeks of data, you need to look over a period, such as 13 weeks. Reserves have grown by roughly $3.3 trillion since the lockdowns hit. Taking away $74 billion is a rounding error.

 And, most important, 13-week annualized money supply growth continues to explode.


  1. If you scan down through ZeroHedge headlines at about 12:00 Eastern time, you can get whiplash.
    Stocks UP, no Down, no Up,no Down, no Up,no Down, no Up,no Down, no Up,etc....
    BTW, what's with all the Corona DOOM stuff there? I thought they were supposed to be like free market...

  2. Thank you.

    Correct me if I'm wrong, but a zero reserve requirement can lead to infinite leverage and unlimited money creation if all banks loaned out every dollar deposited. Practically it means that the Fed has given up control over the money supply and given it to the banks. Can we say anything about what they will do? Or is this terra incognita?