"There is a $1 trillion stash of cash idling in the banking system. It's too big to ignore, and it's a cause for concern.
In normal times, banks hold a bare minimum of funds in reserve to support their liabilities. But these bank reserves now exceed the U.S. Federal Reserve's regulatory floor by $1 trillion. Before the credit crisis intensified in September last year, excess reserves—effectively cash banks hold above their regulatory requirements and usually hate holding—totaled just $2 billion.
The Fed's extraordinary policies aimed at shoring up the economy and banking system are the reason excess reserves have ballooned. As the central bank prints money to buy, say, mortgage-backed securities, much of that extra cash ends up in the banking system, potentially as excess reserves.
So why do excess reserves create disquiet?
First, inflation hawks view them with distrust. In theory, these sleeping funds could be 'activated' to support a huge volume of new loans, which in turn could fuel demand and inflation. True, the Fed can increase interest payments it makes on excess reserves, which would encourage banks to keep holding them and not activate new lending. But that works only if the Fed doesn't wait too long to raise that rate."
