I noted recently the massive increase in the amount of excess reserves held at Federal Reserve banks by the nation's banks, money that basically is just sitting there, earning practically nothing. Excess reserves are monies held at the Fed in excess of the banking sector's reserve requirements. In the week ended Dec. 17, banks had $774 billion in excess reserves, gigantically more than the customary total of just a few billion dollars. The money is the result of the Federal Reserve's massive liquidity injections.
Another way to gauge excess reserves is to look at the cash balances of commercial banks, which can be found in the Federal Reserve's H.8 release, the Fed's weekly report on the assets and liabilities of commercial banks. In Friday's release, cash balances held by commercial banks topped $1 trillion for the first time, reflecting cash balances held at the Fed. Pre-Lehman, cash balances tended to hover around $300 billion, with an annual growth rate of less than 1% per year.
The Federal Reserve's curse on cash, hexed as it was last week with the Federal Reserve's Zero Interest Rate Policy (ZIRP), will eventually pressure banks to use the cash, as net interest margins on loans are far more attractive than the return on cash. Of course, banks need to feel safe that default rates will be low enough to make the foray seem attractive. In due time.
P.S. Will you be there when Cramer makes his next move?
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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