This Month’s Chart Deck

There is still too much money in the financial system. The Fed’s supply of paper money, Federal Reserve notes, topped $2.4 trillion this month, which equals 8% of nominal U.S. GDP (Slide 1), a little less than two percentage points below where it peaked during Covid and the Federal stimulus, but still well above the ratio to GDP which prevailed for most of the last six decades. At the margin, a dollar increase in currency in circulation reduces bank reserve deposits by one dollar. While paper money increased, the passage of the GENIUS Act led to a rally in the price of Bitcoin, which topped over $120,000 for the first time (Slide 2).

Whether dollar-backed stablecoins will succeed as a viable digital electronic payment method remains a question, but the latest FedNow volume data would seem to demonstrate the business use case for digital payment services, as payment volume reached $250 billion last quarter (Slide 3), five times the volume in Q1 2025. FedNow caps the value at $100,000 for a single payment over the network, but banks on the network have the option to allow their customers to make payments up to $1 million. Last quarter, the average single payment over FedNow was $115,332 (Slide 4).

The Fed’s QT caps run-off from its Agency MBS portfolio at $35 billion per month, but given that much of the portfolio was purchased just before the Fed began to hike rates in March 2022, its principal paydowns are down and pacing at roughly $15 billion per month, which at this rate will take years before the portfolio’s size returns to the level it stood at before the Fed began QE in 2020 as a response to the Covid epidemic (Slide 5). Monthly run-off from its Treasury SOMA portfolio remains capped at just $5 billion. Since QT began in July 2022, the Treasury SOMA portfolio balance has decreased to $5.2 trillion, down from a peak of $6.7 trillion. Commercial banks added $171 billion to their Treasury holdings (Slide 6) during that period.

Before the Global Financial Crisis, the Treasury General Account (TGA) balance never exceeded $5 billion to $ 6 billion on any given day. The Treasury’s checking account balance at the Fed became a very different affair as Government shutdowns and debt ceiling drama became more the norm in the process of funding the Federal Government (Slide 7) and preventing it from defaulting.

And despite QT and what the Fed believes is a restrictive monetary policy, loan and deposit growth have grown proportionally since June 2023 when the Fed raised rates for the last time (Slide 8), causing loan to deposit ratios for large and small banks to hold steady at 60% and 70%, respectively. Commercial and industrial loan growth drove overall loan growth (Slide 9), gaining momentum this year, which may be a sign of emerging animal spirits. On the other hand, the consumer’s discretionary spending could be weakening, a warning to be cautious. (Slide 10).