Fed Sees Big Holiday Demand for Cash, Bank Reserves

Article excerpt

Fed Sees Big Holiday Demand for Cash, Bank Reserves

NEW YORK -- With the arrival of the holiday shopping season, the Federal Reserve faces the biggest demand of the year for currency and added bank reserves.

Analysts say the seasonal trend is bound to occur whether the economy is humming along or just barely moving.

Cash Withdrawals

"No matter what the business environment is, boom or recession, the country's need for currency rises sharply, requiring the Fed to take offsetting [reserve] action," said Dean Witter Reynolds' William Sullivan, who sees currency in circulation rising $7 billion to $8 billion by Christmas.

As Christmas approaches, people withdraw more cash from their bank accounts than at any other time of year. These withdrawals drain bank reserves, which the Fed offsets by adding liquidity in the money markets. The big Fed operations contribute to volatility in federal funds, already choppy due to yearend pressures.

Also contributing to the Fed's management problems is the climb, also tied to holiday commerce, in reserves that banks are required to hold against business deposits. Banks must set aside 12% against deposits, and additional reserves drain cash from the banking system.

James Fralick of Morgan Stanley & Co. said he sees currency in circulation rising by about $7 billion, to $306 billion, between mid-November and Christmas. Since 1986, the range of currency increases in the last six weeks of the year has been $5.97 billion to $7.77 billion.

This year's rise could be larger than normal because interest rates are at their lowest levels in 10 years, giving depositors less incentive to keep money in the bank. …