Looking at the Federal Reserve balance sheet over the past month it appears as if there is really nothing new to announce. The Fed continues to buy securities to hold outright in its portfolio.
The Fed added $58.9 billion in U. S. Treasury securities to its portfolio between September 2 and September 30. During this time the Fed also added $33.6 billion in mortgage-backed securities.
Overall , however, Reserve Balances with Federal Reserve Banks, the proxy for excess reserves in the banking system dropped by $107.4 billion to rest at $2,743.23 billion on September 30. That is the U. S. banking system held a little more than $2.7 trillion in excess reserves at the end of September.
The reason for the decline in reserves was primarily related to a $129.9 billion increase in the Treasury’s General Account at the Fed. On September 30d, the U. S. Treasury held almost $1.8 trillion in its primary account, the account that it collects taxes in and from which it writes checks.
In addition, the public added to its holdings of cash during this time of $10.7 billion.
Over the past four banking weeks the effective federal funds rate has remained almost constant at a 0.09 percent level.
Everything in the banking system and the financial markets seem calm and collected.
Since The End Of May
The next division of time I take is between the banking week ending May 27, 2020 and the banking week ending September 30, 2020.
The reason for the selection of the earlier week is that central bank liquidity swaps peaked in that week. On May 27, Central Bank Liquidity Swaps peaked out at $448.9 billion.
One of the major actions the Fed took in March was to help out the world financial system by opening up its window to foreign central banks that needed liquidity in order to help smooth out the problems that were happening all over the world.
As mentioned, the balance of central bank liquidity swaps peaked on May 27, and the following movements on the Fed’s balance sheet seemed to change. Thus, I consider the period from May 27 through September 30 as a different time for policy, one different from the time period from February 26.
From May 27 through September 30, the Fed’s portfolio of securities rose by $513.5 as the Fed steadily added to its outright holdings of Treasuries and mortgage-backed securities.
However, during this time, bank reserves fell by $42.2 billion as central bank liquidity swaps dropped by $425.0 billion and the amount of reverse repurchase agreements on the Fed’s balance sheet dropped by $180.0. These transactions, in effect, offset the amount of securities purchased.
Bank reserves dropped by almost $575.0 billion over this time as the U. S. Treasury continued to bring deposits from the commercial banking system into it’s General account at the Fed and as the private sector removed over $84.0 billion in cash from the banking system.
Still, even though “excess reserves” dropped by this amount during this time, the effective federal funds rate remained relatively constant around 0.09 percent.
The Big Liquidity Drop
The real actions of the Fed began in the last full banking week in February.
Since then the Fed has added just over $2,900.0 billion or $2.9 trillion to its securities portfolio.
“Excess reserves” in the commercial banking system have only risen by $1,063.0 billion as the General Account of the Treasury Department rose by $1,394.0 billion and $$232.5 in cash was withdrawn from the banking system.
Bottom line: the Federal Reserve’s actions since the end of February has increased the liquidity of the commercial banking system by more than $1.0 trillion. The effective federal funds rate was 1.58 percent on February 26, 2020. It was 0.25 percent on March 16, and 0.10 percent on March 25. Since the latter date, the effective federal funds rate has varied between 0.05 percent and 0.10 percent. As stated earlier, the rate has been roughly 0.09 percent recently.
A Few More Milestones
The yield on the 10-year US Treasury note: the yield was 1.27 percent on February 26; 0.69 percent on May 27; and it was o.68 percent on October 1. The Fed’s actions really resulted in a fall in the yield on the 10-year bond that has remained to this day.
The value of the US dollar: the US Dollar Index (DXY) was 99.13 on February 26; it was 99.02 on May 27; and it was 93.71 on October 1.
One Euro cost $!.0884 on February 26; the Euro cost $1.1100 on May 27; and the Euro cost 1.1748 on October 1. From both foreign exchange measures it appears as if the dollar remained relatively steady I value up until May 27, the day the central bank liquidity swaps account at the Fed peaked, but as foreign central banks returned money to the Fed, the US dollar became much weaker.
The S&P 500 index was at 3.116 on February 26. It tanked after that date and reached a trough of 2,237 on March 23. By May 27, the S&P was back up to 3,036 and rose to a new historic high of 3,581 on September 12 before falling back to 3,381 on October 1.
Gold was at $1,642 an ounce on February 26 before dropping, as did the stock market in March. On March 23, gold was at a near term low of $1,561 before rising to $1,712 on May 27. The value of gold hit a historic peak of $2,074 on August 6 returning to close at $1,911 on October 1.
Since the banking week ending February 26, 2020, the financial system in the United States has been through quite a swing. During this time the Federal Reserve has done its best to shore up the U. S. financial system…but, also the financial system of the world. It has done a pretty good job at this.
Still, there remains much to do. The hope is, of course, that the liquidity concerns do not develop into concerns about a solvency problem. Radical uncertainty is in the air.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.