As Americans use bank accounts to pay income tax bills, the amount of reserves in the banking system experienced the biggest drop in two years.
The Zhitong Finance App learned that due to Americans using bank accounts to pay income tax bills, the amount of reserves in the banking system — a key determinant of the Federal Reserve's continued contraction of its balance sheet — experienced the biggest decline in two years.
According to Federal Reserve data, the total bank reserves for the week ending April 17 were $3.33 trillion, compared to $3.62 trillion the previous week. The $286 billion drop is the biggest drop since the April 2022 tax deadline.
Market participants and policy makers are closely watching the amount of cash banks hold in the Federal Reserve to determine what level is sufficient to maintain liquidity and avoid financial market turbulence. As reserves become increasingly scarce, with Tier 1 traders estimated at between $3 trillion and $3.25 trillion, the Bank of America may have to consider changing the trajectory of its balance-sheet relaxation — a process known as quantitative austerity.
Current data shows that the Federal Reserve's reserves are at a level that policymakers think is sufficient. Their goal is sufficient. Federal Reserve Chairman Powell defined sufficient as “slightly below” this level at a press conference after the policy meeting last month. However, the minutes of the meeting show that the vast majority of officials believe it would be prudent to slow down the pace of the final election as soon as possible.
Currently, the short-term financing market has remained stable and unstressed, which provides officials with considerable flexibility as they consider the future path of QT. If the Federal Reserve reduces reserves too much, it may cause fluctuations in the overnight financing market, similar to the situation in September 2019. However, excessive reserves can drain bank capital, discourage loans, and ensure that the Federal Reserve maintains a large footprint in the treasury cash and repurchase market.
In the past, scarce liquidity has caused problems, most notably in September 2019, when factors such as a sudden increase in corporate taxes and a massive increase in bond issuance led to a sudden surge in demand for liquidity. This led to chaos in the overnight financing market and forced the Federal Reserve to intervene.