Kevin Spires, CFA, FRM

The Federal Reserve releases a break down of its Balance Sheet every Thursday afternoon. The Fed has been holding its balance sheet fairly steady this year. Changes in the Fed's Balance Sheet tend to hit the economy with a 12-18 month lag, so we are just now feeling the full effects of QE2 and Operation Twist won't be fully into the economy for another 6-12 months.

Monetary Base Growth Rolling Over?
The Monetary Base has been flat for the past couple of quarters - causing the year over year change to drop to 2%. Does the Fed need to print more money?
Not really - over 50% of the Monetary Base is Excess Reserves held by banks at the Fed. During QE1, there was only a 1% increase in the Monetary Base without Excess Reserves for every 10% increase in the Total Monetary Base. After QE2 and Operation Twist, the relationship has been a 1% increase in the Monetary Base without excess reserves for every 2-2.5% increase in the overall Monetary Base. In other words, Banks have been passing through a higher percentage of the Fed Money Printing as loans to Corporations and Consumers and the growth in the Monetary Base less Excess Reserves is still a healthy 10% year over year. There are plenty of Excess Reserves for Banks to increase lending without any more increases in the Federal Reserves Balance Sheet.
The Monetary Base has been flat for the past couple of quarters - causing the year over year change to drop to 2%. Does the Fed need to print more money?
Not really - over 50% of the Monetary Base is Excess Reserves held by banks at the Fed. During QE1, there was only a 1% increase in the Monetary Base without Excess Reserves for every 10% increase in the Total Monetary Base. After QE2 and Operation Twist, the relationship has been a 1% increase in the Monetary Base without excess reserves for every 2-2.5% increase in the overall Monetary Base. In other words, Banks have been passing through a higher percentage of the Fed Money Printing as loans to Corporations and Consumers and the growth in the Monetary Base less Excess Reserves is still a healthy 10% year over year. There are plenty of Excess Reserves for Banks to increase lending without any more increases in the Federal Reserves Balance Sheet.