The Fed Could Inject $2 Trillion Into The Economy With Its New Bank Backstop Program

(March 16,2023-Anna Golubova)

Could the Federal Reserve's new bank backstop program reverse some of last year's monetary policy tightening? JPMorgan Chase & Co. estimates that the additional funding from the U.S. central bank's new bank backstop program could amount to a maximum of $2 trillion in liquidity.

"The usage of the Fed's Bank Term Funding Program is likely to be big," JP Morgan's strategists, led by Nikolaos Panigirtzoglou, said in a note Wednesday.

The maximum amount projected by JPMorgan is $2 trillion, with the smaller banks likely being the main users of the program, the note said. Another number mentioned was $460 billion. And that was based on the number of uninsured deposits at six U.S. banks with the highest ratio of uninsured deposits over total deposits.

The new Fed program was set up over the weekend after the collapse of Silicon Valley Bank (SVB). "The Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors," the Fed said in a press release.

According to the Fed, the loan numbers will be released weekly and published within the "H.4.1 statistical release titled 'Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks'."

JPMorgan added that $3 trillion worth of reserves is still within the U.S. banking system, but the larger banks hold the majority.

The new Fed program has enough power to reduce the pressing banking reserve issues, but it could also reverse some of the tightening done by the Fed to battle high inflation, JPMorgan said.

In another note published this week, the bank's strategist Marko Kolanovic warned that there are still risks in the stock market due to rising recession fears.

"Following the latest U.S. banking headlines, we think we are heading into a 'bad news is bad news' trading environment, with markets more sensitive to recession risks," the strategist wrote. "While Fed actions reduce the risk … we believe there are many carry trades that will be under pressure, and it will not be possible to backstop all of them."