Fed Reserves Plummet to Lowest This Year Amid Quantitative Tightening
The Federal Reserve has witnessed a significant drop in bank reserves, plummeting to $2.98 trillion, the lowest this year. This decrease, totaling $20.1 billion over a week, is attributed to the Fed's quantitative tightening and the U.S. Treasury's debt issuance. Federal Reserve Chair Jerome Powell has acknowledged that reserves remain excessive, but the current pace may hasten the balance sheet reduction.
The reduction in reserves is primarily driven by the Fed's quantitative tightening, involving a decrease in bond holdings. This measure, designed to combat inflation, has seen foreign banks' reserves decline more rapidly than those of American banks. Powell has indicated that while reserves are currently excessive, they should reach adequate levels in the future.
The Fed has slowed down its pace of quantitative tightening, expressing concerns that rapid reduction could exacerbate liquidity constraints and cause market turbulence. This decision comes amidst a key interest rate cut of 25 basis points, to 4-4.25% per annum, citing slowing economic growth and persistent inflation.
The decrease in bank reserves, fueled by quantitative tightening and debt issuance, has sparked discussions about the optimal level of reserves. While there's no unified stance within the Fed, Vice-Chair Michelle Bowman advocates for the minimum possible balance sheet, and Governor Christopher Waller estimates the critical level to be around $2.7 trillion. The Fed's actions aim to manage inflation and maintain financial stability, with the balance sheet reduction potentially concluding earlier than initially expected.
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