The data …
30-day Federal Funds Futures: 94.55
Interest on Reserve Balances: 5.40%
Discount Window: 5.50%
Effective Federal Funds Rate: 5.33%
U.S. Treasury 10-year bond: 4.91%
The takeaway …
Between August 2022 and August 2023, the U.S. monetary base has fallen 2.36%. The monetary base is comprised of currency in circulation and reserve balances. Currency in circulation consists of Federal Reserve notes and coins outside of the U.S. Treasury and Federal Reserve banks. Reserve balances are held by depository institutions in master accounts and excess balance accounts at Federal Reserve banks.
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Currency in circulation fell from 2276.3 billion dollars in August 2022 to 2331.1 billion dollars in August 2023. Over the same period, reserve balances fell from 3305.9 billion dollars to 3228 billion dollars. During this period of time, the Board of Governors of the Federal Reserve System (Board) was increasing its discount window rate (the rate that member banks can borrow at from the Federal Reserve) and interest rates paid on reserve balances.
I am puzzled as to why the level of reserve balances would have fallen given the rise in interest paid on these balances. Could banks be moving more funds into Treasuries? As of 18 October 2023, the ten-year bond is at 4.91% while the one-month is at 5.57%. A more accurate view would require a look at what the ten-year bond looked like during the August 2022 to August 2023 period.
Mainstream media has been reporting that everyone from China to the Federal Reserve has been avoiding Treasury purchases which may account, in part, for increased yield.
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Meanwhile, three members of the Board, Lisa Cook, Michelle Bowman, and Christopher Waller made remarks or gave speeches earlier today. I will parse through them in the morning. Likely nothing Earth shattering given no change in the 30-day Federal Funds futures which still predicts a 5.45% effective federal funds rate at the next Federal Open Market Committee meeting.
More thoughts tomorrow ….
Alton Drew
18 October 2023
Alton Drew
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