Do banks keep their reserves at the Fed in cash or can they be kept in US Treasuries?

Question

This chart at the St. Louis Fed has a lot of people worried about future inflation, because it represents idle money that, when lent out, could eventually flood the world with 10 - 12 trillion new dollars. But my father says that it has already been lent out in the form of short-term US Treasury notes.

So if it is cash that has not entered the monetary system, we could see some massive inflation when it is allowed to be lent out in our 10% fractional reserve system.

If it is in treasuries, then it's already out, and the chart doesn't pose such a threat.

Does anyone know if excess reserves are or can be held in US Treasuries?

Answer 1

Two kinds of lending going on.

The first occurs when the Federal Reserve purchases government securities. This creates reserves at the Federal Reserve in another bank.

The second kind of lending comes when this bank lends out the money. This is the multiplier effect.

The reason for the excess reserves now is that banks are gun-shy and afraid to lend. Their money is safer at the Fed than with commercial and personal borrowers. When this changes (either by a recovery, or by the Fed penalizing banks for excess reserves, which it can do but hasn't) then we'll see inflation, and a consequential rise in prices.

Answer 2

Many terms a'blending here.

"Reserves" in yankee are merely deposits at the Fed by lending institutions, from bankers to brokers.

"Treasuries" are loans borrowed by the US gov't itself, not its monetary authority, the Federal Reserve. The Fed borrows with the cash (zero coupon perpetuities) or "reserves" (deposits) (zero coupon perpetuities).

Yes, when the Fed owns Treasuries, it's like a subsidiary corporation borrowing to buy the parent corporation's bonds, lol.

If a bank wants to hold Treasuries, it holds Treasuries. If it has to keep some assets in reserve, it holds cash or deposits at the Fed. If it needs to satisfy reserve requirements because of an unpredicted insufficiency, it "borrows" "money" "overnight" from other reserve holders. It's a sale, but it's marked as a loan.