The Fed's Balance Sheet

Federal Reserve credit expanded to a four-week high in the week ended May 20, increasing to $2.165 trillion, an increase of $48.64 billion. The Fed increased credit mainly through securities purchases, which totaled $59.9 billion. The purchases were concentrated, as usual, in mortgage-backed securities, which totaled $46.4 billion. The Fed also bought $2.4 billion of agency securities and $11.1 billion of Treasury securities.

Cumulative purchases for the asset-purchase program total $431 billion of mortgage-backed securities, $77 billion of agency securities and about $120 billion of Treasuries. The combined tally of about $600 billion leaves the Fed with plenty of firepower to influence securities prices, having committed to purchasing $1.75 trillion of securities, consisting of $1.25 trillion of MBS, $250 billion of agencies and $300 billion of Treasuries.

The Fed's securities purchases increase the amount of money that exists in the banking system, mainly in the form of excess reserves, which are those monies over and above required reserves, which are the monies that banks must put aside against deposits they hold. The excess reserves are available for lending, so in theory the increase in excess reserves should boost lending.

After months of increases to the point where excess reserves have gone from near zero to about $800 billion, lending has gone nowhere, because banks have been hoarding cash, fearing losses and marks against their assets. In other words, the velocity of money has fallen; money is not turning over. If velocity were normal, each dollar of excess reserves would translate into between $8 and $10 of loans in the banking system. The more the Fed increases excess reserves, the more comfortable banks might become to boost lending, although the de-leveraging process will likely keep a lid on any increase.

As an important aside, within the H.4.1 release on the Fed's balance sheet is information on foreign central bank purchases of Treasuries. The data show that central banks purchased $25.9 billion of Treasuries in the week ended May 20, following a $23.5 billion purchase the previous week, bringing cumulative holdings to $2.71 trillion. The two-week gain was the most since last October. These figures help show that concerns about the speed at which foreign central banks will diversify out of dollars is misplaced.