Reserves Fell Sharply Last Week, But Still No Sign Of Scarcity (1/2)

Fed balance sheet data out Thursday showed that in the week to September 20, bank reserves fell by $166B, the most since mid-April. Excluding mid-April tax periods, this was the biggest drop since December 2021.

• A big part of this was that factors supplying reserve balances - the "asset" side of the Fed's balance sheet - fell the most in a week since July 2020 ($74B) to the lowest since June 2021 ($8.075T).
• In turn, the main reason for this was a large drop in Fed lending to banks, of over $48B. But that was entirely a one-off drop in "other credit extensions", which are Fed loans to FDIC bridge banks used to help in the resolution process of Silicon Valley and other banks that closed down earlier this year.
• There may have also been significant movement out of reserves and into the Treasury General Account, which rose by $124B last week. (The drop in overnight reverse repo takeup of $59B to a post-2021 low of $1.49T doesn't fully account for that TGA rise.)
• While this brings the level of reserves down to the lowest since late April at $3.144T, they are still slightly up on the year despite the headwinds presented by Fed quantitative tightening and the recent TGA rebuild.
• Reserves will continue draining as the "other credit extensions" continue to unwind (still $85B to go from a $228B peak) and ongoing QT, but they still appear to be ample, with few signs otherwise so far.

Source: BBG, MNI