The Federal Reserve’s inflation-calming moves are reportedly driving money out of the banking system
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Deposits at American banks plunged by a record $370 billion in the second quarter of the year, the first decline since 2018, the Wall Street Journal reported on Tuesday, citing data from the Federal Deposit Insurance Corporation.
According to the report, deposits had dropped to $19.563 trillion as of June 30, down from $19.932 trillion in March.
Deposits in the banking system usually stay relatively stable, the WSJ explained, noting that the Covid-related stimulus has swelled holdings by some $5 trillion in the past two years. “Now, a series of Federal Reserve rate increases is taking some of that money out of the system, in part by decreasing demand for loans and increasing demand for government bonds,” it wrote.
The report pointed out that the Fed’s pace of rate increases has been faster than expected, and as a result the effect on deposits is more pronounced.
Meanwhile, some analysts expect the decline in customer deposits to spur US banks to hold smaller reserves at the central bank. “How fast that happens will carry implications for the Fed, including when it stops tightening and the ultimate size of its balance sheet,” the WSJ said.