Bank Reserves at Fed Drop to $3 Trillion, Lowest Since Jan. 1
(Bloomberg) — The US banking system’s reserves, a key factor in the Federal Reserve’s decision to keep shrinking its balance sheet, tumbled to the lowest in nearly four months.
Bank reserves fell by about $209 billion to $3 trillion in the week through April 30, according to Fed data released on Thursday. That’s the lowest level since Jan. 1 and also the largest weekly slide since the start of the year, exceeding the decline seen two weeks ago when US income tax receipts were due.
The drop comes as banks reined in balance-sheet intensive activities like reverse repurchase agreement (RRP) transactions in order to shore up their books for regulatory purposes. That means cash was directed to places like the central bank’s overnight reverse repo facility, draining liquidity from other liabilities on the Fed’s ledger. Usage of the RRP facility swelled by $79 billion between April 23 and April 30 before falling by $93 billion on Thursday.
At the same time, the influx of tax receipts has contributed to the growth in the Treasury General Account, another Fed liability. Balances in April grew by about $389 billion, ending the month around $678 billion.
The shifts in cash affect the day-to-day operations in the financial system as the Fed continues unwinding its balance sheet, a process known as quantitative tightening or QT. The Fed last month slowed the pace by reducing the amount of bond holdings it lets roll off every month.
While Chair Jerome Powell alluded to modest tightness in money-market rates, officials in January had discussed the potential need to pause or slow the process until lawmakers could strike a deal on the debt cap. That’s due to the fact that a decline in the cash balance could actually push reserves higher, masking money-market signals officials track to identify when balances are approaching levels considered scarce.
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