Bank Liquidity Is Low
Bank Liquidity Suffers When Reserve Requirement Is Set to Zero
The Fed could fix having to come to the rescue by taking the reserve requirement from 0% (where it has been since April 2020), to 10-15%. The Fed won’t do that however as it would cause banks to become more cautious, thereby slowing the economy. God forbid the Fed allow the economy slow and find price equilibrium. The U.S. won’t find price equilibrium until the banking system slows money supply growth.
In the meantime, the Fed will keep playing the Repo game as evidenced by the first chart below: “Total Overnight Repurchases by the Fed across all securities”. Last night’s figure hit $75 billion, the highest level since March 17th 2020 at $153 billion.
The second chart plots the money supply as measured by M1.
