E What The Fed Did Do At Its Last Meeting On April 30 - May 1, 2019

The rate has fallen, and the table below shows the impact of this change.

(Click on image to enlarge)

change in interest earned on excess reserves

(Source: Author calculations based on Trading Economics Government Debt measure)

This income adds to the bank's capital base, which, in turn, means it can increase its lending if creditworthy borrowers wish for a loan, or it could be paid out in dividends, stock buybacks or excessive executive remuneration.

On Balance, What Does This All Mean?

There are winners and losers from changes to Fed policy. In this instance:

Banks - The banking sector loses $1B of annual interest income

Borrowers - Should have no impact unless the banks pass their lost income onto customers in the form of higher rates and fees.

The macro-economy

The following table shows the impact on the macro money supply.

(Click on image to enlarge)

macro fomc policy impact

(Source: Author's calculations based on FRED statistics and Trading Economics dot com statistics)

As a result of the Feds actions, macro income has dropped $1B with the banking sector now receiving less interest income from excess reserves.

The Fed increases its income profits by the same amount which it then largely remits to the US Government as a dividend. Because the US Government is the monopoly manufacturer of the US dollar this is akin to returning water to the sea or sunlight back to the sun.

The net result is that banks have $1B of reduced income and the macroeconomy shrinks by the same amount.

Interest income from treasuries has fallen by $1B due to the lower level of treasuries on the issue due to the debt ceiling reduction accounting.

The total macro shrinkage from the last meeting is $2B overall.

While this is a real and tangible change, it is unlikely to have any impact on markets given its relatively small size at the macro level.

 

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Comments

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Robert P. Balan 1 year ago Contributor's comment

Fantastic article, Alan. Thanks for sharing.

Harry Goldstein 1 year ago Member's comment

Agreed.

Alan Longbon 1 year ago Author's comment

Thanks Robert.

Alan Longbon 1 year ago Author's comment