Reserve balances with the Federal Reserve, which I thought astonishing almost two months ago, have continued to rise, as this graph from the Federal Reserve Bank of St. Louis indicates. The reserve balances with the Federal Reserve are now almost as large as currency holdings. In the week ended Jan 7, currency in circulation was $887,700 million and Reserve balances with Federal Reserve Banks were $878,178 million. The latter number has increased by $873,986 million in the last year.
I keep hearing that credit markets are improving, so maybe there is light at the end of the tunnel.
Comment: As financial conditions return to normal, the Fed will have the difficult task of removing these bank reserves in a manner that does not abort a recovery but also that does not allow them to spur excessive monetary growth. The reserves that are in the banking system today are enough to give us hyperinflation. The Fed has never been in the situation that it is in today--it is totally new territory. Most people are focused on the dangers of recession, but there is also a real danger of inflation down the road. How much do you trust the Fed's competence?
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