Key Fed Data Later Today

We continue to closely follow the Federal Reserve's Thursday data releases, which include its balance sheet and its custody holdings for foreign central banks.

The US current account deficit, economists point out, is the difference between savings and investment. It, not the budget deficit, is the amount that needs to be financed by foreign capital. The preliminary Q1 08 current account deficit was reported yesterday at $101.49 bln. It brings the four-quarter deficit to $628.27 bln.

Reserve accumulation and its currency composition is subject to great interest and debate. What we know for sure is that many central banks use the Fed's custodial services, even if precisely who does is a closely guarded secret. At the end of Q1 09, foreign central banks help $2.494 trillion in US Treasuries and Agencies with the Federal Reserve.

This represents a little more than a $410 bln increase over the past four quarters. Just those central banks who use the Fed's custodial services financed nearly 2/3 of the accumulated current account deficit over that period.

In addition to the custody holdings, the Fed will report its balance sheet later today. As of last week, assets on the Fed's balance sheet totaled $2.053 trillion. This is up from $871 bln last May. The rapid expansion of the Fed's balance sheet is locus of the inflationary risk.

Yet look closer at the Fed's balance sheet and look at excess reserves. These are reserves that the banks are keeping with the Fed the exceed the required levels. These stood at $838.5 bln last week. That means that a little more than 70% of the expansion of the Fed's balance sheet is sitting at the Fed itself and is not being used for new lending or credit creation, or chasing goods or financial assets.

So, not only is it difficult to think about sustained inflation when there is so much slack in the factor markets (rising unemployment and record low capacity utilization rates), but much of the expansion of the Fed's balance sheet has not bled into the real economy.