by Mish Shedlock, Mish Talk:
The Fed pays interest to banks on reserves the Fed crammed down banks’ throat during QE. It also pay interest on Reverse Repos.
Chart Notes
- Data reflects end of month numbers. The latest reserve balance is from the New York Fed. The rest of the numbers are via a St. Louis Fed download.
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- Note the stairstep pattern on interest paid on reserves. The interest rate rises every time the Fed hike rates.
- Due to Quantitative Tightening (QT), reserve balances at the Fed have slowing been declining every month.
With these numbers in hand, we can calculate the free money the Fed gives to banks.
Free Money to Banks Annualized Calculation
Free money to banks, Mish calculation
Two forces are in play. A reduction in reserves lowers the free money. Rate hikes by the Fed increase the amount of free money.
QT takes away about $95 billion a month from the total amount the Fed pays interest on.
Next week the Fed will hike 50 basis points to a range of 4.25 percent to 4.50 percent. I expect the new interest rate will stairstep to 4.40 percent (3.90 + 0.50).
Year-to-Date Free Money Given to Banks
We can calculate free money paid to banks by taking 1/12th of the annual rate for each month this year and summing the amounts.
Through November, I estimate about $84.7 billion has been handed out to banks. That is a bit on the high side due the net impact of mid-month hikes and QT (one adds, the other subtracts).
Hooray for BanksÂ
If we factor in an expected interest payment 4.40 percent on about $5 trillion (reserve balances plus reverse repos), we can estimate the December free money will be approximately $22 billion.
For the full calendar year, figure that about $100 billion in “free” taxpayer money will be given to banks this year.
Because rate hikes outweigh QT and because we are starting the year at a much higher interest rate, figure free money too banks will we far greater than $100 billion in 2023.
The current annual rate calculation is $206 billion and rising, not counting expected hikes in December and in 2023. Free handouts may come close or even exceed $200 billion.
