The excess reserve component has risen in the past two years, but mostly they are required reserves.
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As you know, the Federal Reserve pays 25 bps to private banking institutions on their excess reserve balances.
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Yes, some of that excess reserve drain is due to a decline in Federal Reserve balance sheet footings.
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In one sense, those excess reserve dollars are trapped at the Fed, like asteroids endlessly circling the Sun.
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To be specific it is excess reserve accounts at the Federal Reserve, which in the modern world are actually electronic.
Look at what's happened since the Federal Reserve began creating excess money in 2004.
In 2004 gold shot up well above its 12-year average, thus screaming that the Federal Reserve was creating excess liquidity.
Worried that all that pent-up credit would fuel reckless lending or inflation, the Fed simply doubled the reserve requirement, transforming excess reserves into mandatory ones.
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Banks now get a 25 basis point interest rate return on their reserve deposits with Federal Reserve Banks, including their excess reserves.
But if this trend in private bank money creation continues, it does augur for higher rates of monetary inflation, especially, as Chairman Bernanke suggested at Jackson Hole in August, if aided and embedded by a reduction in the rate of interest the Federal Reserve pays banks on those excess reserves.
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Mr. Bernanke was mindful of the problem created during the Great Depression when the Fed used its new authority to raise reserve requirements because banks were flush with excess reserves.
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Alas, those excess savings are a euphemism for excess money creation by central banks, particularly the Federal Reserve.
First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions.
This conundrum may also be viewed in terms of the significance of the behavior of the monetary base, which is a combination of bank reserve deposits at the Fed (both required and excess) and currency outside the banking system.
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Certainly, there are all too many banks out there, fearful of the holes that are their balance sheets, that will continue to hoard their excess reserves, happy to earn the 25 basis points the Federal Reserve pays on those reserves.
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Every time the Federal Reserve (and the central banks before it) created an excess of money, either by keeping interest rates too low or by injecting liquidity into banks, prices inflated.
If we had a truly independent Federal Reserve (one that was not willing to buy all the excess government debt) these larger deficits would make much more of an immediate and discernable impact on the financial markets and the economy.
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The White House could also urge Ben Bernanke and the Federal Reserve to get more serious about fighting inflation by mopping up some of the excess liquidity that he and predecessor Alan Greenspan spawned.
The Federal Reserve can nip this thing fairly quickly by selling more bonds from its portfolio, thereby removing excess cash from our banking system.
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