Wall Street banks remain in the doldrums in the face of the current macroeconomic scenario. During the last quarter, 370,000 million dollars in deposits were withdrawn from the same. Being a record figure and the first since the fall in 2018, according to David Benoit in The Wall Street Journal.

Deposits fell to $19.563 trillion as of June 30, down from $19.932 trillion in March, according to the Federal Deposit Insurance Corporation.

The exit in the quarter is not a problem for the banks, which have more deposits than they want. Deposits in the banking system are generally relatively stable, but have increased by about $5 trillion in the past two years due to the pandemic stimulus. Now a series of rate hikes by the Federal Reserve is taking some of that money out of the system, in part by decreasing demand for loans and increasing demand for government bonds.

When the Fed began raising its benchmark rate this year, banks expected — and wanted — some customers to move their money to places that offered higher interest payments, like government bonds.

As recently as April, many analysts scoffed at the idea that bank deposits could decline this year. But the pace of FED rate hikes has been faster than expected, and the effect on deposits is more pronounced.

The deposit outflows will fuel a debate about how the Fed’s measures to tighten the money supply and slow the pace of inflation will play out in a banking system awash in liquidity.

Stimulus programs during the pandemic nearly tripled the amount of reserves commercial banks hold at the Federal Reserve. The Fed wants to reduce those reserves as part of its efforts to get money out of the system, but only to an unknown floor that will keep markets liquid and functioning.

Some analysts expect that declining customer deposits will prompt banks to hold fewer reserves at the Fed. How quickly that happens will have implications for the Fed, including when it will stop tightening and the ultimate size of its balance.

Complicating the forecasts is a $2.2 trillion Federal Reserve Bank of New York program where investors park cash, which has held steady despite rising rates. That money comes largely from money market funds. The reverse repurchase facility increased during the pandemic, as overstretched banks began pressuring their customers to put some of their deposits into money market funds.

Many analysts thought the money would flow out of the reverse repo facility first. But so far the opposite has happened, with deposits down, which could reduce bank reserves at the Fed faster than expected. That could prompt the Fed to end tightening measures early next year, some economists said.

“I think we’re much closer to the floor on reserves than consensus,” Mike Cloherty, head of rate strategy at UBS, said at a roundtable Friday organized by the Bank Policy Institute.

Bill Nelson, chief economist at BIS and a former Fed money supply official, still thinks the reverse repurchase program is likely to wind down next year, giving the Fed more time. But, he says, the odds are they may be changing.

“There is definitely a possibility that we will see a rapid outflow of deposits,” Nelson said.

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