S-2113-119
Committee on Homeland Security and Governmental Affairs. Hearings held.
Sponsored by Rand Paul (R-KY)
What it does
This bill would amend the Federal Reserve Act to bar Federal Reserve banks from paying interest on balances (reserves) that depository institutions hold at the Fed. Currently, the Fed pays interest on reserve balances (IORB) as a key tool for implementing monetary policy and controlling short-term interest rates. This bill would eliminate that authority entirely.
Who benefits
Advocates argue taxpayers and smaller community banks could benefit if the change reduces payments the Fed currently makes to large banks holding excess reserves, and proponents of reduced Federal Reserve discretion over monetary policy tools. Critics of current Fed policy who view interest-on-reserves payments as an indirect subsidy to large financial institutions would see this as addressing that concern.
Who is hurt
Depository institutions of all sizes that currently earn interest income on reserve balances, particularly large banks holding substantial excess reserves, would lose that income stream. The Federal Reserve would lose a primary tool for controlling the federal funds rate, which could complicate monetary policy implementation and potentially destabilize short-term interest rate targeting, indirectly affecting borrowers and savers economy-wide through less predictable monetary policy transmission.
Supporters argue
Supporters argue that paying interest on reserves amounts to a taxpayer-subsidized payment to large banks, noting the Fed has paid tens of billions of dollars annually to depository institutions since the policy began in 2008. They contend eliminating these payments would end what they view as an unwarranted transfer to the banking sector and force the Fed to rely on other tools like open market operations to manage rates.
Opponents argue
Opponents argue that interest on reserves is the Federal Reserve's primary and most effective tool for implementing monetary policy since 2008, allowing precise control over the federal funds rate without requiring massive balance sheet operations. They contend eliminating this tool could force the Fed toward less efficient methods, potentially causing more volatile interest rates and worse economic outcomes for borrowers and savers nationwide.