Fed Chairman Powell warns against removing power to pay interest on reserves

From Yahoo Finance: 2025-06-25 10:34:00

Federal Reserve Chairman Jerome Powell warned against stripping the central bank of its power to pay interest on reserves, calling it a difficult and volatile process that wouldn’t save money. The power gained significance during the financial crisis, with the Fed using it to implement monetary policy and stabilize short-term rates.

The Fed’s interest on reserves tool, currently at 4.4%, sets the top end of the federal funds rate, while the reverse repo rate, at 4.25%, establishes a floor. However, this system has led to the Fed losing money, impacting its profitability. Despite this, the Fed maintains that profits and losses don’t hinder its policy goals.

Sen. Ted Cruz seeks to eliminate the power to pay interest on reserves to reduce deficits, but Powell argues it wouldn’t save money and could disrupt the financial system. Ending this power would be complex and take years to execute, posing challenges and volatility in the process.

New York Fed President John Williams emphasized the importance of the interest on reserves power in controlling interest rates and achieving monetary policy goals. Analysts warn that removing this power could destabilize the financial system and drive up interest-related costs for the central bank.

Returning to a scarce reserves system like pre-2008 would require the Fed to aggressively shed bonds, potentially stressing markets and increasing long-term borrowing costs. Experts caution against such a move, as it could complicate Wall Street’s handling of government borrowing increases.



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