Emergency lending isn't monetary easing
Friday, March 17, 2023 at 12:42PM
Simon Ward

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. 

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.

Article originally appeared on Money Moves Markets (https://moneymovesmarkets.com/).
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