Fed staff discovered that one reason the federal-funds rate was behaving so abnormally was because money-market funds were building up cash in preparation for redemptions, leaving hoards of cash at their banks that the banks wouldn’t invest.
U.S. depositary institutions on average held excess reserves of $90 billion each day this week, estimates Lou Crandall, chief economist at Wrightson ICAP. This is cash the banks hold on the sidelines that does not earn any interest. That compares with an average of $2 billion, he says, noting he estimates banks held $190 billion in excess cash on Thursday, as they feared they’d have to meet many obligations at the same time.
Through Wednesday, money-market fund investors — including institutional investors such as corporate treasurers, pension funds and sovereign wealth funds — pulled out a record $144.5 billion, according to AMG Data Services. The industry had $7.1 billion in redemptions the week before.
Gosh, I wonder what the crisis next weekend will be!