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Bank Deposits at Fed Top $1 Trillion

By Dan Weil   |  

Thanks to the Federal Reserve's massive quantitative easing (QE) program, banks have more money than they know what to do with.

So they're parking much of their cash at the Fed, where they receive a 0.25 percent interest rate. Indeed, bank deposits at the Fed have topped $1 trillion, reaching that record level in April, Fortune reports.

But while bank reserves at the Fed are soaring — up 25 percent, or $200 billion, in the first quarter alone — lending slumped during that period.

Editor's Note:
Make 2013 the Year You Pay Zero Taxes

Concerns about the deposit bulge are twofold. First, money that is parked at the Fed is doing nothing to help the sluggish economy. Second, what happens to the deposits when the Fed reverses its QE?

Many believe the Fed will hold onto the bonds until they mature, which would be years, because if the Fed sells its bonds, it would be very disruptive to the bond market. Therefore, the extra cash at the Fed could be around for long after the economy has recovered.

But some aren't worried because when the Fed sells its bonds, it will simply receive back in return the cash it provided during QE — the same cash that banks have deposited at the Fed.

"Reserves don't even factor into my model," former Fed Governor Laurence Meyer, co-founder of Macroeconomic Advisers, tells Fortune. "That's not what causes inflation and not how the Fed stimulates the economy. It's a side effect."

Still, The Wall Street Journal's Vincent Cignarella argues that the bulge in bank deposits at the Fed helps prove that QE is a failure. "Instead of lending out the cheap cash they’ve obtained from the Fed, banks continue to give it back to the central bank," he writes.

Editor's Note: Make 2013 the Year You Pay Zero Taxes

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