The Federal Reserve’s daily cash operations approached $1 trillion on Wednesday, as banks and other market participants drowning in cash look for somewhere to park their money.
The Fed’s “reverse repo” facility, where financial institutions can deposit cash overnight, took in an all-time high of $992 billion on Wednesday, according to Fed data. Usage shot up 121% in the month of June and is up 248% from April 2020, the last time the facility saw heavy use. At the beginning of 2021, the facility went essentially untouched.
Some observers worried the unprecedented volumes of cash could spell trouble for markets.
“This is far more important than people realize,” tweeted Guy Adami, a trader and former CNBC host. Adami described it as “eerily reminiscent” of “nasty market action” that occurred in September 2019, when a cash crunch caused the repo market to seize up.
But New York Fed President John Williams reassured investors last week that he was not concerned by the level of reverse repo activity, according to Reuters. Should volumes increase further, “it would just be a sign that it’s working as planned,” Williams reportedly said.
The record level comes after weeks of all-time highs, as an “overflowing river of liquidity” washes over markets. Most recently, the flood has come from the Fed’s ongoing asset purchases combined with a legislative requirement that the US Treasury must run down its cash holdings by the end of July.
Because most short-term investments yield virtually nothing, investors have flocked to the reverse repo facility – which yields just 0.05%.
Last month, the US Federal Reserve acknowledged that businesses and banks in various parts of the country were once again having a hard time getting their hands on enough quarters, nickels, dimes, and pennies.
But this time is different.
“Since mid-June of 2020, the U.S. Mint has been operating at full production capacity,” the bank said. Last year the Mint produced 14.8 billion coins, up 24% from the year before.
It’s not a shortage, per se, but that doesn’t explain why you can’t get a roll of quarters to do your laundry.
To find out, the Fed and other partners did what they do best: convened a task force.
The US Coin Task Force discovered that of the roughly $48.5 billion of metal currency in circulation, much is “sitting dormant” in the pockets, jars, and couch cushions of America’s 128 million households.
In other words, there are more than enough coins in existence, they just aren’t flowing smoothly thought the economy. Money, as you may recall, serves three key functions: a unit of account, a store of value, and a medium of exchange.
“The weak circulation affects most everyone, but the hardest hit are small cash-dependent businesses and those who are least well off,” task force member Hannah vL. Walker said in a statement. “For millions of Americans, cash is the only form of payment.”
Right now, the dormant coins are performing the first two roles just fine and failing at the third. The problem for the Mint is that it can’t arbitrarily make more coins available without causing a lot of other problems in the US monetary system.
The tack force recommends an even simpler solution: break open that piggy bank.
“If just a fraction of the coin sitting dormant in households and businesses is redeemed and reused, this problem can be greatly reduced,” the task force said.
By spending, depositing, or converting unneeded coins, the Mint said consumers can help close the circulation loop that has been disrupted over the past year and get a small but important part of the market moving again.
“We have a lot of cash and capability and we’re going to be very patient, because I think you have a very good chance inflation will be more than transitory,” Dimon, the longest-serving CEO among the big US banks, said.
He suggested the risk of higher, more persistent inflation is growing. US inflation, or the rise in prices of goods and services, has picked up dramatically compared with last year, when the economy was in lockdown. Disruptions to the global supply chain and a burst of consumer spending have added to the increase. Higher interest rates would help ward off a more damaging pickup in inflation.
“If you look at our balance sheet, we have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,” he said. “I do expect to see higher rates and more inflation, and we’re prepared for that.”
While several Fed officials have been resolute in their view that the rise in inflation will ultimately prove transitory, other influential leaders have warned of the consequences of rising prices.
In a 1980 shareholder letter, Warren Buffett described high inflation as a “tax on capital” that dissuades corporate investment. The billionaire investor said the rise in general price levels can hurt more than income tax, and rising costs force companies to spend cash just to maintain their business – regardless of whether they’re generating profits.
JPMorgan, the largest US bank by assets, expects $52.5 billion in net-interest income in 2021, down from its previous expectation of $55 billion, partly due to a decline in credit card balances.
Separately, at Monday’s conference, Dimon said he planned to hold his position at JPMorgan for at least the next two to three years. Without giving an exact time frame, he said: “I intend to stay, which is sanctioned by the board, for a significant amount of time.”
Central banks will soon need to issue digital currencies as the use of cash slowly becomes irrelevant, according to UBS chief economist Paul Donovan.
“Central bank digital currencies are likely to start becoming part of individual economies’ payment systems in the coming years,” he said in a note published this week.
People are using physical forms of money, like notes and cash, much less than before. Moreover, about half of Sweden’s banks no longer accept cash and its economy is expected to go cashless by 2023.
“We wave debit cards and mobile devices around with the reckless abandon of a first year student at Hogwarts trying out a wand, magically paying for things without ever having to touch cash,” Donovan said, referring to the boarding school in the “Harry Potter” series of children’s books.
Donovan laid out specific differences between how CBDCs would operate compared with cryptocurrencies. CBDCs would be interchangeable with notes and coins in circulation, accepted for tax payments, and wouldn’t have wild fluctuations in value – unlike typical crypto, such as bitcoin. Officially backed digital currency supply could change depending on the central bank’s ability to regulate the spending power of the currency, he said. Meanwhile, cryptocurrencies are decentralized and cannot be controlled by any one party.
He also said digital cash is a direct claim on the private bank to which its account is tied, and not on the government. This means government-produced money is becoming less significant, while digital money produced by the private sector is increasing in importance.
“If central banks want to stay relevant as cash becomes less relevant, they might have to consider entering the world of digital money,” he said.
China is among the leading economies looking closely at CBDCs. The People’s Bank of China aims to become the world’s first to issue a digital currency as part of a push to reduce its reliance on the dollar-denominated financial system, according to Reuters.
Federal Reserve Chairman Jerome Powell said last month a potential digital dollar is a “high priority” project for the US. But he thinks CBDCs should exist alongside cash and other forms of money, rather than replace them entirely.
With President Biden’s signature now sealing the $1.9 trillion American Rescue Plan, most households nationwide are set to receive their third stimulus check in a year. This relief is urgently needed as new unemployment insurance filings continue to surpass one million on a weekly basis a year into the pandemic. However, for the third time, policymakers will rely on an inefficient, patchwork system to deliver this relief – a system that previously excluded millions, and left others waiting months for support.
The lesson is clear: our policies are only as good as the plumbing that delivers them. To better respond to this crisis and those to come, Congress needs to scrap the current fragmented system and build a direct and seamless infrastructure capable of sending cash quickly and automatically when families – and the economy – need it. In short, Congress needs to create a “cash button.”
Direct cash payments are a time-tested economic relief and recovery strategy. In the 2001 and 2008 recessions, and as economic stimulus tax credits in 2009 and 2011, cash was a standard feature. But despite their demonstrated value as a countercyclical measure, the government has not invested in the infrastructure to ensure that cash payments can be efficiently and equitably distributed. A strong foundation for cash relief will also be necessary for the new income support program provided within the expanded child tax credit.
This first attempt last year to get aid to struggling families suffered a number of setbacks. Despite the CARES Act passing in late March, by October, around 12 million people, disproportionately Black and Latinx households, had yet to receive their Economic Impact Payments. Even state unemployment insurance systems, a longstanding source of income support, were unable to distribute cash quickly. The Century Foundation estimated that by the end of May 2020 less than 60 percent of the 33 million UI claims made since the start of the pandemic had been paid – leaving millions of families experiencing or on the brink of financial hardship.
To be sure, the federal and state governments patched up issues throughout the months-long rollout of CARES Act checks, as well as the December stimulus. They included the creation of systems for low-income families who do not file taxes to receive the payments, and used the federal Direct Express debit cards and state EBT systems to speed disbursement. Yet problems remain: due to the inefficient and incomplete infrastructure, many people in need still haven’t received their benefits.
First, using records maintained by the Social Security Administration (SSA) and the IRS, the government can build an integrated database of individuals who would receive cash, similar to what was proposed by Rep. Rashida Tlaib in her BOOST Act, to ensure minimal coverage gaps. The SSA could then administer payments automatically to those in need, in particular because the SSA is already tasked with sending out tens of millions of payments through direct deposit and Direct Express debit cards each month.
Second, to reach those not covered by federal records, the government can allow individuals to apply for cash support and qualify through any existing state-administered benefits systems, such as the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps.
Lastly, the federal government should establish public bank accounts to provide a secure endpoint for cash assistance and ensure that the millions of households currently unbanked and underbanked could receive aid without having to rely on check cashers or paid tax preparers as they currently do. Two options for public banking are postal banking and private federal reserve accounts. A no-cost checking account through the USPS would allow anyone with an address to receive electronic transfers, from the Treasury, the Social Security Administration or the Federal Reserve.
Fed accounts, free, personal, no-cost bank accounts set up through the Federal Reserve system, would allow instantaneous cash transfers to account holders and could be linked to existing accounts at commercial banks or set up as part of postal banking, creating a seamless pipeline for disbursement. Since the USPS operates ubiquitous local branches, including in rural and low-income areas where commercial banks do not maintain a presence, postal banking could serve as a platform for a host of other financial services and help foster financial inclusion.
These three steps will create a safety net for the 21st century. As we saw with the CARES Act, poverty rates decreased nationwide and an estimated 12 million people were saved from falling into poverty. While delays and missteps blunted its impact, we have an opportunity to do better and we must take it.
There is extensive evidence that cash works, and with the federal government now tasked with distributing the American Rescue Plan’s child allowance (which is likely to become a permanent part of the safety net), it is time for policymakers to establish the plumbing required to provide cash relief nimbly and efficiently when crises occur. We need to build a cash button, and legislators have the options at hand to make that a reality.
Stephen Nuñez has over a decade of experience in research and program evaluation related to welfare policies and economic inequality. He holds a PhD in sociology from Stanford University, and in his current role, leads JFI’s research on guaranteed income in the US and internationally.
Rachel Black is an Associate Director of the Aspen Institute’s Financial Security Program (FSP). She previously served as Director of New America’s Family-Centered Policy program. Her work has been featured in a diverse set of outlets, including The Washington Post, The New York Times, The Atlantic, Slate, and Essence.