Federal Reserve Alert! Federal Reserve Board announces annual indexing of reserve requirement exemption amount and low reserve tranche for 2023. To be set at $36.1 million, up from $32.4 million in 2022, and the low reserve tranche will be set at $691.7 million, up from $640.6 million in 2022.

by Dismal-Jellyfish

Source: www.federalreserve.gov/newsevents/pressreleases/files/bcreg20221129a1.pdf

The Federal Reserve announced the annual indexing of the reserve requirement exemption amount and the low reserve tranche for 2023. The annual indexation and publication of these amounts are required by law and does not indicate a change in depository institutions’ reserve requirements, which will remain zero.

If reserve requirement ratios were not zero, these amounts would be used to determine the different ranges of reserve requirement ratios that could apply, depending on the amount of transaction account balances at a depository institution. The reserve requirement exemption amount will be set at $36.1 million, up from $32.4 million in 2022, and the low reserve tranche will be set at $691.7 million, up from $640.6 million in 2022. The adjustments to both of these amounts are derived using formulas specified in the Federal Reserve Act.

The adjustments will apply beginning January 1, 2023.

Year Low reserve tranche amount (millions of U.S. dollars) Exemption amount (millions of U.S. dollars)
2023 691.7 36.1
2022 640.6 32.4
2021 182.9 21.1
2020 127.5 16.9
2019 124.2 16.3
2018 122.3 16

Source for chart: www.federalreserve.gov/monetarypolicy/reservereq.htm

Why does this matter? The Reserve Requirement is supposed to affect interest rates.

Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks charge more to lend it, which sends interest rates up.

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On March 15, 2020, the Fed announced it had reduced the reserve requirement ratio to zero effective March 26, 2020. It is still 0.

Prior to the change effective March 26, 2020, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution. A certain amount of net transaction accounts, known as the “reserve requirement exemption amount,” was subject to a reserve requirement ratio of zero percent.  Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the “low reserve tranche,” were subject to a reserve requirement ratio of 3 percent.  Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas specified in the Federal Reserve Act

Since the fed funds rate is rising to fight inflation, it costs more for banks to lend to one another overnight, which has the same effect as raising the reserve requirement.

However, by increasing the tranche and exemption, along with 0 reserve requirements, the Fed is hoping to increase liquidity.

Can we marvel for a moment at the jump in Low reserve tranche amount from 2021 to now?

2021, it is 127.5 million, today for 2023, 691.7 million, an almost 6x increase in 2 years! Remember:

Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the “low reserve tranche,” were subject to a reserve requirement ratio of 3 percent.  Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10 percent.

By jacking up the Low reserve tranche amount, the Fed appears to be ‘saving’ banks 7% on their reserve requirements. Now why would they need to do that?…

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