2
$\begingroup$

Over the last few years, the amount of currency is circulation (and the corresponding liability on the Fed's balance sheet) has been growing; however, the asset side of the BS hasn't increased. By basic accounting, that means one of the other liabilities (either required reserves or excess reserves) has been shrinking.

I'm guessing the growth in currency volume has been offset by declining excess reserves, but I don't understand the mechanics of that. Does the fed send $100 bill to a bank and then reduce that banks' excess reserves by 100 dollars? If so, how does the Fed decide which banks' account will be reduced by how much?

$\endgroup$
1
$\begingroup$

As you point out excess reserves have indeed been going down since around 2014.

reserve balances with Fed

The Federal Reserve doesn't force member banks to withdraw excess reserves, although the Fed can provide incentives to do so by lowering interest rates on those reserves. In other words, excess reserves have been going down because member banks have chosen to withdraw reserves to, for example, purchase financial assets.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.