There is a huge amount of excess reserves just sitting in bank vaults (actually on deposit at the Fed). By huge, I’m talking around $2.5 trillion. That amount is from Charles Plosser, chairman of the Philadelphia Federal Reserve Bank.
Marketwatch reports on 5/20: Chalres Plosser thinks there’s a ticking time bomb at the Fed.
Look at it a different way. Here is the M1 money stock, which I pulled from the Fed’s database:
See that huge increase in M1 from the start of the latest recession? M1 has doubled. Up from $1,380B in 10/07 to $2,778B in 4/14.
That would otherwise have created a lot of inflation unless the economy was surging. Instead, that money hasn’t been loaned. That tells me the velocity of money has collapsed (see Mr. Plosser’s comment about “excess” reserves sitting on the Fed’s balance sheet). Banks aren’t lending.
All those reserves are just sitting around. If they pour into the economy through a rapid increase in borrowing, that would create a lot of pressure on inflation. That would in turn push the Fed to raise interest rates quickly. Which would slam the brakes on the economy.
Of course, that all assumes the economy actually accelerates.
There is significant danger behind that chart. I sure do hope the Fed knows how to handle it.