Congress May Be Coming for Fed’s Reserve Interest Powers Next
By John Heltman
WASHINGTON — The ease with which Congress was able to take money from the Federal Reserve to pay for a highway transportation bill — by slashing the dividend the central bank pays large banks — is likely to encourage lawmakers to take another dip into the Fed’s books next year. While it’s not clear exactly what they might target next, many observers believe it will be the interest the agency pays for excess reserves held at Fed banks. Karen Shaw Petrou, managing partner of Federal Financial Analytics, said the issue has yet to gain traction — but that could change next year during the next budget battle. “Right now, it’s quiet,” she said. “I think it will take its place in next year’s fiscal discussions, but most importantly in the near term, because of the nature of the omnibus … when the next omnibus comes up on or around September 30, what are they going to do then?” Petrou said that the difference between banks and nonbanks — and a reasonable basis for the justification for putting them on the top-end of the spread — is that banks have an important role to play in the economy and are subject to considerable capital and supervisory requirements as a result. “The cost of being a bank, especially a big one — which is the eligibility criteria to being a member of the Federal Reserve and having access to excess reserves — is very high,” Petrou said. “Secondly, one of the reasons excess reserves are as high as they are … is because banks have no place else to put the money. Some of that is the capital rules and the liquidity rules … and some of it is that the economy remains in very modest recovery, and there’s not a lot of loan demand.”
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