By Stan Szymanski

For a couple of weeks now I have been mulling over a recent writing by the prolific Jim Rickards- ‘Rickards: Fed’s Cure May Be Worse Than The Disease’ as it was reposted by Zero Hedge (7/24/22). Mr. Rickards explains the situation we are facing with aplomb. His excellent writing gave me impetus to go one step further with my own thought process.

In his opening salvo, Mr. Rickards proclaims:

…’Right now, it’s basically a case of the Fed versus the economy. You might say, “Wait a second. Isn’t the Fed supposed to help the economy?”

Well, not exactly. They may want to help the economy, but helping the economy actually isn’t job one. Job one is helping the banks. The Fed was essentially created to prop up the banking system and prevent bank runs.’…

That statement of …’Job one is helping the banks. The Fed was essentially created to prop up the banking system and prevent bank runs‘…. This is what got to me. If the Fed is there first and foremost for the banks and not necessarily the people, then if the Fed is going to keep raising rates, how will that help the banks?

On its face, it seems counterintuitive. Raising the Fed Funds Rate by definition would increase the interest rate that banks charge other banks when they lend money to each other for the purpose of maintaining the Federal Reserve Bank Reserve Requirement.

During most of recent history, the Reserve Requirement that the Fed imposed on member banks was 10%. In other words, if a depository institution took in $1,000 in deposits, it had to hold onto $100 and could lend out the remaining $900. The Reserve Requirement is meant to be a buffer for the bank against negative unforeseen business and market events.

On March 15, 2020, the Fed proclaimed that the Reserve Requirements would be set to zero (0%). This means that the depository institutions no longer had to maintain the previous 10% buffer. The banks now had more money available for operations.

So if the marble buildings with the safe in the basement don’t have to worry about maintaining a ‘reserve’ (because the requirement is now zero), why is the Fed bothering with the increase in the Federal Funds rate? What influence is there on the borrowing cost of the institution when the Fed says you don’t have to maintain a reserve balance?

I believe that it is something known as excess reserves.

Excess reserves are defined at Investopedia as such:

…’Excess reserves are capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors, or internal controls. For commercial banks, excess reserves are measured against standard reserve requirement amounts set by central banking authorities. These required reserve ratios set the minimum liquid deposits (such as cash) that must be in reserve at a bank; more is considered excess.’…

Prior to 2008, banks were not paid any interest on their excess reserves. The Great Recession changed all of that. From that point on, the banks were paid interest on their excess reserves.  So at this point in 2008, the banks still had to maintain a 10% Reserve Requirement and if they were prudent enough to have ‘excess reserves’ they were now getting paid by the Fed to hold them.

Fast forward to the ‘pandemic’ crisis of 2020. According to Investopedia:

…’Proceeds from quantitative easing were paid out to banks by the Federal Reserve in the form of reserves, not cash. However, the interest paid on these reserves is paid out in cash and recorded as interest income for the receiving bank. The interest paid out to banks from the Federal Reserve is cash that would otherwise be going to the U.S. Treasury.’…

Did you get that? During the crisis the Fed paid the banks in the form of reserves and then paid them interest in the form of cash on those reserves. So the Fed capitalized the banks and then put the cherry on top and paid them interest on the amount capitalized.

The same article shows that excess reserves went from $1.3-1.6 trillion in 2019 to $3.2 trillion on May 20, 2020. -That- is quite an injection of capital. It also states that:

…’Historically, the fed funds rate is the rate at which banks lend money to one another and is often used as a benchmark for variable rate loans. Both the IOR and the IOER (interest rate on excess reserves) are determined by the Federal Reserve, specifically the Federal Open Market Committee (FOMC). As a result, banks had an incentive to hold excess reserves, especially when market rates were below the fed funds rate. In this way, the interest rate on excess reserves served as a proxy for the fed funds rate.’…

In 2021 the Fed stopped using the term ‘excess reserves’ and just started reporting the interest rate on all reserves as the ‘Interest Rate On Reserve Balances (IORB).

Currently, the ‘Interest Rate On Reserve Balances’ (IORB) is 2.40%. The current for the Fed Funds Rate is 2.25-2.50% with the top 75% of banks at a rate of 2.33%. So this info does show that the Fed Funds rate is a proxy for what the Fed pays the banks for their excess reserves.

Bloomberg has posted a recent headline: ‘Traders Brace for 4% Fed Terminal Rate as Yields Keep Soaring‘. If the Fed Funds rate goes to 4%, where is the the Interest Rate On Reserve Balances going to? If no one (the depository institutions) pay the Fed Funds rate in practice because the Reserve Requirement is 0%, then why is there so much press time and ink dedicated to the Fed Funds Rate?

At this point, when the Fed raises the Fed Funds Rate it is a smoke screen and a ruse done in order to tell a story to the public that it is fighting inflation when in fact, the Fed is pumping more and more money into the banks via the interest paid on excess reserves every time it raises the Fed Funds Rate.

One can now clearly see that the Federal Reserve has pumped inordinate amounts of money into the banks of our country, especially since the pandemic of 2020. As Jim Rickards says,

…’The Fed was essentially created to prop up the banking system and prevent bank runs’…

The lowering of the Reserve Requirement, the infusion of Reserves into the depository institutions and the interest payment on Reserves has certainly been done to ‘prop up the banks’. Maybe all that is left is the next massive infusion to actually fend off runs on the banks that this country has not seen since the 1930s.

In my humble opinion, the banks have been in trouble and are in trouble now. If we see higher Fed Funds rates, which is widely expected, it is just the public face which masks the payments of more money (interest on reserves) to the banks to prop them up.

This is not financial advice. If it were me (and it’s not me), I would consider getting money that I did not need for month to month operation of my life and get what I could into physical precious metals. Gold and silver is no one else’s liability (famous saying by Bill Holter). Steve Quayle is fond of saying, ‘If you can’t touch it-you don’t own it’. If you are not familiar with dealings in precious metals, please get a professional (like those mentioned above) to help you. Get to know a local coin dealer or two as at some point, everything will be local. And most importantly, ask God almighty and His son, Jesus Christ for wisdom during this ‘age of deception’. The deception of this time is so great that we will not be able to discern the truth without the understanding that comes from the author of all that is true and good.

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Stan Szymanski (or Encouraging Angels) is not a medical doctor. This is not medical advice. In all matters pertaining to the health and care of a human being consult a medical doctor. This is not legal, financial or personal advice. Consult appropriate professionals in those fields for that type of advice.