Banks returning extra cash to Fed
WASHINGTON (January 4, 2000 9:20 a.m. EST nandotimes.com)
Around the country, armored trucks are carrying back to the Federal Reserve some of the billions of extra dollars distributed to banks in case of Y2K panic.
Economists said Monday the temporary displacement should have no significant impact on the economy.
Yields on Treasury bonds, meanwhile, hit two-year highs as some investors sold bonds they had been holding as insurance against Year 2000 disruptions. The selling wave pushed down bond prices, which move inversely to yields.
"It appears to be money going back home," said David Wyss, chief financial economist at Standard and Poor's DRI in Lexington, Mass.
In addition, government bond prices were driven lower by what Allen Sinai, chief global economist at Primark Decision Economics, called "the same old concern: inflation and the Fed" and whether the central bank would raise interest rates early next month.
The Federal Reserve distributed some $80 billion to banks, thrifts and credit unions during the fourth quarter of 1999, compared with $23 billion over the same period a year ago. But some of the extra currency could have been requested for reasons unrelated to Y2K, such as bank customers' holiday shopping needs, Fed officials say.
Now that 2000 has arrived without a run on banks, the banks and other financial institutions started packing up the surplus currency and sending it back to regional Federal Reserve banks, as previously planned. The process is expected to take several days.
"The funds were just there temporarily," Wyss said. "(The Fed is) going to take them right back."
Since most of the Y2K money stayed in bank vaults and didn't get into the public's hands, there shouldn't be any inflationary effect on the economy, he said.
Still, the Fed needed to provide the extra cushion of cash to reassure the public, banks and the financial markets, Sinai said from New York City.
"No responsible central bank could have done otherwise," he said.
Overall, the nation's banking system appeared to be operating largely free of Y2K glitches on the first business day of 2000 - when weekend transactions were first accounted for in massive computer databases.
ATMs - stuffed with extra cash - continued to work, and bank balances and loan information appeared accurate throughout the system, government and banking industry officials reported.
"We've been doing the 'health checks' of financial institutions," said Fed spokeswoman Rose Pianalto, referring to the telephone calls to the nation's banks made by Fed employees. "There have been no major problems reported."
In addition, Pianalto said, the central bank's check-clearing operations, which process 68 million checks on a typical day, continued to operate normally. "Everything went smoothly," she said.
Banking industry officials say they're optimistic people won't experience problems withdrawing cash from automated teller machines.
Still, banks will be watching closely to see how their computer systems perform this week.
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Surely the repatriation of the cash back to the Feds should affect liquidity and hence the performance of the stock markets, in particular the Nasdaq. Any comments about this?
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