vrijdag 9 februari 2018

Interest payments on excess reserves at the Federal Reserve

Very nice article on the Federal Reserve and its interest payments to the banks.


One wonders what will happen when yields go up and the FRB unwinds its balance sheet in this environment. Will it have enough revenue to pay these interests on excess reserves, especially with higher fed funds rates. Will it have enough money left to remit to the treasury? We already see these remittances to the treasury going down since 2015. More debt will be issued once the treasury is empty again.

The Fed started to pay interest on reserve balances at the Fed since 2008, to address conditions in credit markets.


Once the Fed becomes insolvent (because interest rates rise), it will have to monetize and create even more money. It won't be able to execute remittances anymore to the treasury. It won't be able to pay interest on excess reserves to the banks. This paper explains it perfectly.


And by the way, the central bank is on its way to becoming insolvent as unrealized losses are growing.


You can see here that when bond yields go up, the unrealized losses will go up.

And each time, these losses worsened, the Federal Reserve started another round of QE.

One of my favourite tools to see if the Fed is in deep trouble is the cash balance at the U.S. treasury.


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