Friday, February 11, 2011

Fed Balance Sheet Update

The latest information on the state of the Fed's balance sheet is available here. The Fed continues to purchase long-term Treasury securities at about the rate set out in the QE2 plan in November, with securities holdings increasing by $28 billion over the previous week. Of particular note is that reserves increased by $64 billion, in part due to the Fed's asset purchases, and in part because balances in the Treasury's reserve accounts fell by $41 billion. The balance in the Treasury's general account fell by $16 billion and, of particular note, the balance in the Treasury's supplementary account fell by $25 billion. It is clear what a reduction in the Treasury's balance in the supplementary account does: it increases reserve balances held by the private sector, and reduces outstanding Treasury debt. However the reason for the existence of the account, and the motivation of the Treasury to change the balance in the account are mysteries. The last time there was a reduction in the balance, beginning in October 2009, the Treasury reduced the balance by $35 billion per week until it was close to zero, then increased it again to a level of $200 billion. Presumably there will be reductions at the rate of $25 billion per week again. Another point of interest is that there was a substantial increase in currency outstanding in the past week, of about $8 billion, or about 0.8%. Year-over-year, the currency stock is now growing at about 6%. Thus, QE2 is now producing much greater growth in outside money than it was.

7 comments:

  1. "It is clear what a reduction in the Treasury's balance in the supplementary account does: it increases reserve balances held by the private sector, and reduces outstanding Treasury debt."

    So, does the Treasury retire outstanding debt with these funds?

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  2. Given the Treasury's budget constraint, if they are not changing expenditures on goods and services, transfers, or taxes, then a reduction in the supplementary account balance has to imply that debt outstanding is smaller than it would otherwise be.

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  3. Don't all money-banking textbooks tell students that the Fed is in complete control of the monetary base? Seems to me that at least in the short-term, the Treasury can alter the monetary base by moving funds in or out of its Fed account(s). In real-time the Treasury seems to be able to dictate monetary policy!!!

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  4. There are some things that money-banking books leave out. The Fed could offset what the Treasury is doing, but currently it seems to be choosing not to. In normal times, the Treasury manages its accounts so that it mitigates disruption in the Fed's fed funds targeting procedure, and the Fed tries to anticipate changes in reserves that result from Treasury actions.

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  5. "Trouble is, anyone who believes in rational expectations, real business cycle theory, strong EMH etc. is actually "kooky" themselves. These things are far more disconnected from reality than anything the Austrians came up with."

    Right, because people clearly don't try to do the best they can confronted with the constraints they face, and they don't try to arbitrage assets, and there aren't important variations in real quantities. Jeesh, there ought to be a test or something before people are allowed to publicly speak about economics.

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  6. "Another point of interest is that there was a substantial increase in currency outstanding in the past week, of about $8 billion, or about 0.8%. Year-over-year, the currency stock is now growing at about 6%. Thus, QE2 is now producing much greater growth in outside money than it was."

    1. Should we be looking at currency in circulation or currency outstanding?

    2. Are you zeroing in on currency because this is the ONLY way banks can make use of their excess reserves? Can't banks use excess reserves directly to make new loans by transfering funds from their Fed account to a customers deposit account at a bank?

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  7. 1. It's close to the same thing.
    2. I've discussed this in earlier posts. Under current circumstances, reserves look much like Treasury bills, as long as they just sit in financial institutions overnight. However, reserves can be withdrawn as currency. If something changes that makes reserves less attractive to hold for financial institutions, the equilibrium adjustment of asset prices and prices of goods and services implies that the reserves become currency, and prices of good and services rise. Problem: the demand for US currency is unpredictable, so the linkage between currency growth and inflation is weak.

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