In recent developments, North American banks have reported earning a staggering $1 trillion in profits over the past two and a half years, largely attributed to the high interest rates set by the US Federal Reserve. Major banks such as JPMorgan Chase and Bank of America have maintained deposit rates significantly lower than the Fed's benchmark rates, averaging around 1.5% and 1.7% respectively, while the Fed's rates peaked at 5.5%. This disparity has allowed banks to generate extraordinary profits, with an average annual interest rate paid by banks in Q2 being only 2.2%, a mere 0.2% increase from two years prior. The Federal Reserve recently cut interest rates from a range of 5.25%-5.5% down to 4.75%-5%, which may further influence the banks' profit margins and consumer behavior. Economists are closely monitoring upcoming inflation data, as it is expected to play a crucial role in shaping future economic decisions. [32cfe892]
As the banking landscape continues to evolve, recent data indicates that American households are sitting on record levels of interest-earning cash, with money market fund (MMF) and certificate of deposit (CD) balances reaching an unprecedented $7.4 trillion. By the end of Q2 2024, MMF balances held by households surged to $3.94 trillion, a significant increase from $2.6 trillion during the pandemic. Overall, total MMFs held by both households and institutions climbed to $6.55 trillion, reflecting a growing preference for these low-risk investment vehicles. Meanwhile, large time-deposits, defined as CDs of $100,000 or more, saw a slight decline to $2.32 trillion in July 2024, while smaller CDs under $100,000 increased to $1.11 trillion. Additionally, the amount of outstanding Treasury bills (T-bills) reached $6.11 trillion, indicating a robust demand for government-backed securities. Total deposits at all commercial banks also edged up to $17.5 trillion in July 2024, showcasing the overall health of the banking sector. This shift in savings behavior comes after the Federal Reserve halted rate hikes in July 2023, prompting banks to raise interest rates to remain competitive against MMFs and T-bills. As a result, many Americans are actively arbitraging the rate differences among various savings instruments, seeking the best returns on their cash holdings. [6c1bb3d1]
In a related development, the amount of reserves in the US banking system saw its largest drop in two years, coinciding with the tax season. Reserves decreased from $3.62 trillion to $3.33 trillion in the week through April 17, marking a decline of $286 billion. This drop is significant as it is the largest since the April 2022 tax deadline. The Federal Reserve is closely monitoring these levels, as they are essential for assessing liquidity and potential impacts on financial markets. As reserves approach a target level estimated between $3 trillion and $3.25 trillion, the Fed may need to adjust its balance-sheet unwind strategy to maintain stability in overnight funding markets. Although the current level of reserves is deemed abundant, having too many reserves can consume bank capital and hinder lending. [1bbb7f61]
Furthermore, the Federal Reserve System remains the world's richest central bank, boasting $7.84 trillion in assets, while European central banks collectively hold $11.09 trillion. The top ten central banks by total assets include the People's Bank of China and the Bank of Japan, underscoring the dominance of Europe in terms of central bank assets. [f7125f50]