Grant’s examines the unprecedented buildup of Federal Reserve excess reserves following quantitative easing and questions whether policymakers can unwind them without disrupting markets. The article argues that nearly $2 trillion in idle reserves could eventually challenge inflation control, while highlighting political, banking, and bond market constraints.
Demobilizing the reserves
Grant's
James Grant
Research
24 Pages
Key Takeaways
Record Excess Reserves: Excess reserves reached $1.983 trillion, equal to 12.4% of GDP, versus an average of just 0.5% between 1929 and 2007.
Foreign Bank Exposure: Foreign bank branches held $738 billion, or 37% of total excess reserves, creating potential political and policy complications if reserve interest rates rise.
Limited Exit Flexibility: The Fed earned 2.9% on its assets in 2012 while paying 0.25% on reserves, limiting how far it could raise reserve rates without eroding its own income.
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