Contrary to scaremongering, no cash shortage at Fed
Simon Ward
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There is a scare story doing the rounds about US banks “running out of cash at the Fed”. This is based on the Fed’s H.3 statistical release, showing that “non-borrowed reserves of depository institutions” (second column of table) turned negative in the latest fortnight.
The story revolves around a misunderstanding. The Fed supplies cash reserves to the banking system either via sale-and-repurchase agreements (repos) or lending from the discount window or more recently under the Term Auction Facility. Only repo-sourced reserves are classified as “non-borrowed”.
Banks have recently taken advantage of the TAF to source their needed reserves so repos have fallen, pushing non-borrowed reserves into negative territory. However, total reserves have remained stable (first column) and above the level dictated by reserve requirements (third column). There is no aggregate shortage of cash at the Fed. Banks have chosen to use the TAF because they can obtain longer-term funds against a wide range of collateral.
If there were any shortage of cash the fed funds rate would be trading above the Fed’s 3.0% target. It has been below the target on average so far this week.
Fear levels are about as high as they get when such stories are taken seriously.
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