Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: carranza2 who wrote (105868)	4/27/2014 2:03:03 PM
From: bart13	Read Replies (1) \| Respond to of 217710

The four main reasons for high reserves in my opinion are: 1. Interest on reserves paid by the Fed help to control interest rates. It backs up the Fed Funds rate at ~.25%. 2. In case of another crisis, those reserves can be used to support bank balance sheets, and the Fed could force the banks to use them that way. Currently they're about $2.6 trillion, which is almost 4x TARP. 3. The banks can easily pull them out but haven't, probably due to relatively low credit demand. 4. It's Accounting 101. When the banks sell Treasuries to the Fed in QE actions or POMOs, the Fed has to pay the banks for them and the excess reserve account is both "safe" and convenient for those deposits. Dropping rates below zero doesn't seem to help much, if at all. One of the Scandinavian countries (Sweden?) recently backed down on them since it didn't produce the kind of increase in lending that was expected, plus rates went down for consumers who partly live off interest so there was political pressure too. The Fed doesn't want to, they likely consider it an inflation risk and are trying to keep inflation sentiment low. As excess reserves, it's not actually money in circulation too.