Who Benefits From the Fed?

We recently looked at the Federal Reserve’s 2012 results. In particular, we pointed to some positive and negative developments. On a positive note, the Fed managed to shrink down the size of its balance sheet by approximately one-third of a percent. (Hey, it’s a start.) On a negative note, this decrease occurred because banks shifted their holdings of reserves into cash, thus forcing the Fed to sell off some of its assets. I explained that this is a potentially negative result, as the shift into cash brings with it inflationary pressure on prices.

In this article I want to point out who has benefited from the Fed’s operations over the past year.

There has been a lot of discussion about the large increase in reserves, and especially excess reserves, held by the banking system. Mostly this discussion is couched in terms of the increase in the money supply. While the increase in excess reserves—less than $2bn in August 2008 to almost $1.5 trillion at the end of 2012—does represent an increase in the money supply, some rule changes accompanying the crisis also signify that they are part of a bailout. One aspect of the Fed’s crisis response was to commence paying interest on required and excess reserve balances. (The required reserve is the amount of money banks must hold to meet the minimum reserve requirement on deposits, and excess reserves are any amount held in excess of this minimum.)….(here)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s