Here’s something I missed back in May that makes me mad as hell. And it should make you mad as hell too.
The Fed has expanded its Term Deposit Operations, moving more spaghetti around on the plate, the plate being the liability side of its balance sheet- aka “money.†The Fed announced that it would do 8 weekly operations with its member banks beginning on May 19. The first 4 are at approximately 26 basis points, then the next 4 at 30 basis points. These deposits are like bank CDs with a term of 7 days.
This is a direct giveaway to the banks at the expense of US taxpayers. The banks will shift as much of their excess cash as they can, subject to the $10 billion per bank limit, from their regular deposit accounts at the Fed (aka reserves) to these higher interest paying term deposits. This is cash which the Fed has given them for free in the first place. Earn free income from free money. Nice work if you can get it.
Last week those term deposits grew by $16 billion on the Fed’s balance sheet from an operation conducted June 2. That’s just a drop in the bucket compared to what’s coming. The June 9 operation shifted $78 billion into these giveaways.
Meanwhile the Fed will continue to send them more free cash, week in and week out under QE, even though those amounts are somewhat reduced. The trick there is that the Taper does not reduce the excess cash the dealers get because the Fed has been matching QE to Treasury supply. That’s a whole ‘nother story, however, which I cover in depth in the weekly Fed Report (next one coming up this afternoon).
This will have absolutely no impact on the Fed’s balance sheet or the Primary Dealer Balance sheets. They’re still short term liabilities to the Fed and short term assets of the banks. To the banks, there’s no practical difference between their regular deposits at the Fed and a one week term deposit. It’s all excess liquidity which can be used for mischief making whenever they damn well please. The only impact will be that the additional free income the Fed now literally hands over to the banks will increase the banks’ bottom lines. This cash will subsequently be transferred to the pockets of bank CEOs and executives in the form of increased bonuses and stock option buybacks.
