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Federal Reserve Watch: Balance Sheet Has Increased By $2.5 Trillion

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Via SeekingAlpha.com

The Federal Reserve, according to the Fed’s H.4.1 statistical release Factors Affecting Reserve Balances at Depository Institutions, added $81.8 billion to its balance sheet in the banking week ending April 29, 2020.

This brought total Federal Reserve assets up to $6.7 trillion.

Reserve balances with Federal Reserve banks, basically the excess reserves in the banking system, rose by $63.5 billion to bring this total up to just under $3.2 trillion.

Since the banking week ending February 26, 2020, the time when Federal Reserve policy shifted into its present operating stance, the Fed has added $2.5 trillion to its asset total.

Reserve balances with Federal Reserve banks have risen by just under $1.5 trillion sine February 26.

Since February 26, the Federal Reserve opened up a series of accounts that are being used to support banks and securities dealers as well as the Paycheck Protection Program (PPP) and has added $126.5 billion to the financial system to provide needed liquidity in the money markets and in the economic system.

The Federal Reserve continues to support central banks around the world. The Fed has provided liquidity swaps to other central banks of $439.0 billion since February 26.

FEDERAL RESERVE SECURITIES PURCHASES

Since February 26, the Federal Reserve has purchased a lot of government securities, as it said it would

Just this past banking week, the Fed purchased $62.0 billion of Treasury securities, upping the total amount it has bought since February 26 to just under $1.5 trillion.

Just a note of reminder: in August 2008, just before the start of the Great Recession, the total assets held by the Federal Reserve totaled only around $950.0 billion. This gives us some idea of the magnitude of what Federal Reserve officials are now doing.

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Furthermore, since February 26, the Federal Reserve had added $232.2 billion in mortgage-backed securities to its securities portfolio.

Overall, the Fed’s holdings of securities bought outright have risen by $1.730 trillion since the start of this policy effort.

WHAT THE FEDERAL RESERVE IS FINANCING

There are three places that the Federal Reserve financing is going.

First, as mentioned above, the Fed has generated a lot of excess reserves for the banking system. The amount of excess reserves generated totals $1,483.4 billion.

A total of $63.5 billion was added to this total this past week.

Second, the Fed has underwritten a $110.5 billion increase in currency in circulation.

Last week I indicated that this increase was exceedingly large and went against the usual seasonal behavior. The reason for this is that during troubled times, people and businesses always tend to hold more cash, so currency in circulation goes up.

Cash is held because of the uncertain times and also because people out-of-work or facing reduced incomes…generally the less-well-off…tend to take money out of banks and keep the money on hand for current payment needs. This obviously has happened in the current crises period.

Note that currency in circulation, just last week, increased by $14.5 billion, which is a very large movement in historical terms.

Third, Deposits with Federal Reserve Banks, other than reserve balances, have risen by $835.0 billion since February 26.

The primary reason for this increase is that the General Account of the US Treasury Department has increased by almost $700.0 billion.

The Treasury’s General Account is the account that the Treasury Department writes checks from. So, it is not surprising that this account has risen so dramatically as the US Congress passes legislation aimed at putting a lot of money into the economy to help keep the economy from falling apart.

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We can expect this account to decline in the near future as the government’s spending is deposited in the banking system.

Another $135 billion has moved into accounts that have to do with government accounts or foreign accounts that will also be put into the economy in the coming weeks and months.

RESPONSE TO THE FEDERAL RESERVE ACTIONS

My impression is that the actions taken by the Federal Reserve are still being received well by traders in the financial markets.

Federal Reserve Chairman Jerome Powell has not recused himself in his massive office in the Federal Reserve building but makes himself available to the press on a regular basis to announce new actions on the part of the Fed or to even make comments about the state of the economy and what to look forward for. He is presenting himself to the world as a positive force who knows what he and his organization are doing.

Right now, my feeling is that world markets continue to trust Mr. Powell and the Federal Reserve.

I have cited the strength of the US dollar as market evidence of support for what the Federal Reserve is doing and what it is achieving.

By Friday, May 1, the value of the dollar has fallen slightly from one week ago. For example, the US Dollar Index (DXY) was 98.87 versus 100.35 last week, and the it now costs about $1.10 to buy one Euro where last week one euro costs about $1.08.

Caitlin Ostroff reports in the Wall Street Journal that the drop off is positive because

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“The clamor for dollars eased and Treasury yields declined Friday, signs that the Federal Reserve’s moves to increase dollar access are calming markets at the heart of the global financial system.”

So, Mr. Powell and the Fed appears to be calming markets as they work to keep things from not getting out-of-hand as economic recessions proceed and as pandemic crisis continues to spread.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.




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