Fed Officials Can't Agree How Big U.S. Bank Reserves Should Be

(Bloomberg) -- Although Federal Reserve policy makers agree they need an “ample” supply of reserves to ensure control over short-term interest rates, they’re having trouble agreeing on how much that actually is.

When the Fed accumulated bonds to fight the 2008 financial crisis and its aftermath, the hoard proved useful to banks. Financial institutions could include those cash balances in their stable of high-quality liquid assets to satisfy post-crisis regulatory requirements. With the Fed still shrinking its balance sheet, policy makers are now trying to determine the optimal level of reserves. It currently stands at about $1.6 trillion.

That schism was on display Wednesday when the minutes from the Federal Open Market Committee’s March gathering were released. Worried about interest-rate volatility if reserves shrink too much, some meeting participants said they’d like to start buying Treasuries “relatively soon” after the balance sheet runoff ends in September. Other policy makers, confident there won’t be “excessive volatility” in money markets, wanted to let bank balances continue to drop after September to learn more about underlying demand for reserves. There were other opinions, too.

“It’s a divided committee on this question, ‘How far are you willing to go,’” said Mark Cabana, head of U.S. interest rates strategy at Bank of America Corp. “Some want to stabilize the level of reserves around the $1.2 trillion level,” because they don’t know the appropriate amount, he added. “Others want to go a bit further.”

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