The US monetary base, comprising currency in circulation and banks' reserve balances at the Fed, contracted by a further 1.4% in the week to Wednesday and is now 7.3% below its February peak – see chart.

As previously discussed, the fall reflects a build-up of cash in the Treasury's accounts at the Fed, mainly due the "supplementary financing programme" (SFP), involving the Treasury issuing additional bills and depositing the proceeds at the central bank. The resulting reduction in bank reserves has contributed to a recent firming of short-term market rates.

The liquidity withdrawal suggests that the Fed is in the early stages of a tightening process that could result in a rise in official rates this summer. If so, the statement issued after next week's policy-setting meeting should be less dovish, qualifying the commitment to "exceptionally low levels of the federal funds rate for an extended period".

The SFP is now up to the targeted $200 billion, implying no further negative impact on the monetary base. If the Fed wishes to continue to drain liquidity, it must either request an expansion of the programme or begin to conduct reverse repo operations or auctions of term deposits, as described in a February speech about exit strategy by Chairman Bernanke.