According to reports, the Federal Reserve’s moves to stop inflation are causing money to leave the banking system.
The Wall Street Journal reported on Tuesday, based on data from the Federal Deposit Insurance Corporation, that deposits in American banks fell by a record $370 billion in the second quarter of the year. This was the first drop since 2018 and was the largest drop ever.
According to the report, as of June 30, deposits had gone down from $19.932 trillion in March to $19.563 trillion.
The WSJ said that deposits in the banking system are usually pretty stable, but that the Covid-related stimulus has increased holdings by about $5 trillion in the last two years.
“Now, a series of rate hikes by the Federal Reserve is taking some of that money out of the system, partly by making people less interested in loans and more interested in government bonds,” it said.
According to the report, the Federal Reserve has been raising interest rates at a quicker clip than was anticipated, and as a consequence, the impact of these rate hikes on deposit balances has been amplified.
In the meantime, some analysts believe that the fall in customer deposits will prompt banks in the United States to hold smaller reserves at the central bank.
The WSJ said, “How fast that happens will affect the Fed, such as when it stops tightening and how big its balance sheet will be in the end.”
