Lending by the Fed to depository institutions jumped from $15 billion to $318 billion between 8 and 15 March - see chart 1 (red line). The emergency loans – mostly via the discount window and via the FDIC rather than under the new Bank Term Funding Program – were the main driver of a $441 billion surge in banks’ reserves at the Fed. 

Chart 1 

These developments do not represent an easing of monetary conditions, except relative to a much tighter baseline that would have resulted from the Fed failing to accommodate increased demand for monetary base due to the banking crisis. 

• Unlike QE, Fed lending to the banking system has no direct impact on money stock measures (i.e. money held by households and non-bank firms). (QE has an impact to the extent that securities are purchased from non-banks.) 

• Unlike QE, the reserves rise is temporary and will reverse if the crisis abates and lending is repaid. 

• The emergency / temporary nature of the lending / reserves rise implies no incentive for banks currently experiencing inflows to expand assets. (QE can have secondary monetary effects by encouraging lending / securities purchases.) 

Resolution of the crisis requires the authorities to arrest broad money contraction. A run-down of the Treasury’s cash balance at the Fed won’t be sufficient; QT needs to be suspended / reversed to offset a cutback in lending by troubled banks. Consideration should also be given to limiting the drain of deposits to money funds, e.g. by capping their access to Fed’s overnight reverse repo facility.