Thursday, September 30, 2010
In this post, I was puzzling over the recent behavior of reserve balances. In this chart, if you look at total reserves of private financial institutions plus the reserves held by the Treasury in its General Account, some of the blips, including the most recent one, go away. You see a decline in this total since the beginning of the year (it's weekly data, from the beginning of 2007; I did not mark off the dates), but no rapid recent decline. What is going on is the following. When the Fed holds an auction of Treasury debt, it appears this typically goes temporarily into the Fed's general account with the Fed, until the Treasury spends the funds. In "normal" times, the Fed would typically offset the effects so that you see no effects on reserves or the effective fed funds rate. Currently, the Fed does not bother to offset these things, so a Treasury auction will temporarily increase funds in the Treasury's reserve account, and reduce private sector reserves.