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Should We Be Concerned About Extra Reserves?

Should We Be Concerned About Extra Reserves?

Economic Policy Papers are derived from policy-oriented research generated by Minneapolis Fed staff and specialists. The documents are a periodic show for a basic market. The views expressed loannow here are the ones regarding the writers, not always those of others within the Federal Reserve System.

Executive Overview

Banking institutions in the us have actually the possibility to improve liquidity abruptly and significantly—from $12 trillion to $36 trillion in money and simply accessed deposits—and could thus cause unexpected inflation. This can be feasible because the nation’s fractional bank operating system enables banking institutions to transform extra reserves held during the Federal Reserve into loans from banks at about a ratio that is 10-to-1. Banking institutions might participate in such transformation when they think other banking institutions are planning to achieve this, in a way just like a bank run that produces a prophecy that is self-fulfilling.

Policymakers could protect from this possibility that is inflationary the Fed attempting to sell monetary assets it acquired during quantitative easing or by Congress somewhat increasing book needs.