J.P. Morgan sees Fed leaving $1 trillion in bank reserves

January 30, 2019

NEW YORK (Reuters) – J.P. Morgan on Wednesday raised its estimate on the amount of excess reserves that the U.S. Federal Reserve would leave in the U.S. banking system to $1 trillion, double what it had previously projected.

The latest estimate suggested the U.S. central bank would end the normalization of its balance sheet, at about $3.5 trillion, in the early second quarter of 2020, J.P. Morgan economist Michael Feroli wrote in a research note.

Concerns about rising borrowing costs for banks have stoked speculation whether the Fed would halt the shrinkage of its balance sheet, which is primarily made up of Treasuries and mortgage bond, sooner than previously thought.(GRAPHIC-Bank excess reserves held at the Fed: https://tmsnrt.rs/2BiDDzx)

“For many years we have argued that it would be optimal for the Fed to supply an abundance of reserves to the banking system,” Feroli said.

The central bank began paring its bond holdings in the fourth quarter of 2017 as a part of its plan to move from emergency stimulus it implemented to combat the global financial crisis and the ensuring recession a decade ago.

In the wake of post-crisis regulations for U.S. banks to hold more reserves, Feroli said more reserves are likely required in the banking system for “the new normal.”(GRAPHIC-U.S. Federal Reserve balance sheet : http://tmsnrt.rs/2ewcgXW)

A $1 trillion in excess reserves “seems like a reasonable stopping point for balance sheet normalization,” Feroli wrote.

Feroli said he expects the Fed would signal adjustments on its balance sheet normalization by the summer.

(Reporting by Richard Leong; Editing by Alistair Bell)