Sunday, February 8, 2009
Reserve balances down $200 billion from peak
For all those alarmists like Dick Morris who worry about hyperinflation because the Fed has been "pumping massive liquidity" into the system, they should have a look at reserve balances. In the past month reserves have declined by 25% (over $200 billion), indicating that the Fed is actively working to bring them down. Ongoing Treasury sales will sustain this process.
In addition, President Obama's executive compensation cap may unwittingly add to the contraction in reserve balances as companies that don't want to come under this restriction scramble to pay back government funds. This flow of funds, from the private sector to the Fed will result in downward pressure on reserves. This could complicate monetary policy as the Fed may not want reserves to fall that fast given the weak economy and still-fragile credit markets.