Federal Reserve Watch: Protecting The Banking System

As the Federal Reserve oversees the reduction in its securities portfolio, last week presented a major challenge for the commercial banking system. However, quick action was taken by the Fed to keep the system afloat. Amid quantitative tightening, excess reserves in the banking system rose due to a rise in commercial bank reserves at the Fed.

The rise in Commercial Bank Reserves at the Fed

With an oversaw reduction in its securities portfolio of $8.3 billion and a decline of almost $600.0 billion in its securities portfolio, Reserve Balances with Federal Reserve Banks saw a rise of $440.5 billion in excess reserves during the last banking week. This was due to the Fed opening up its “loan” window and overseeing a $302.9 billion rise in loans and a $137.3 billion decline in Reverse Repurchase Agreements.

What’s Next for the Federal Reserve?

The current situation has put Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, in a policy dilemma. To combat the high inflation rate, Mr. Powell should continue the efforts of quantitative tightening. While many investment community members may believe he will quickly “bail out” of this effort and adopt a much easier monetary stance, Mr. Powell and the Fed need to “keep on.”

Related Facts

• The effective Federal Funds rate in the last banking week was 4.57 percent on March 9 and 10 and 4.58 percent for the rest.
• Reserve Balances With Federal Reserve Banks saw a rise of over $440.0 billion in the past banking week.
• During the past week of financial stress, the Fed oversaw a reduction in its securities portfolio.

Key Takeaway

The key takeaway from this week’s Federal Reserve Watch is that while challenges have arisen for the commercial banking system, quick action taken by the Fed has prevented any major disruptions. In addition, a rise in excess reserves in the banking system stabilized the effective Federal Funds rate. Mr. Powell and the Fed should continue efforts of quantitative tightening to fight inflation.

Conclusion

With the Federal Reserve overseeing a reduction in its securities portfolio amidst a high inflation rate, the banking system faced a major challenge last week. However, quick action was taken by the Fed to keep it afloat. Mr. Powell and the Fed must continue their efforts of quantitative tightening to battle this inflation and maintain stability in the banking system.