Congress’ New Cookie Jar: Interest on Reserves
On December 23, the Fed’s portfolio held a jaw-dropping $7.4 trillion, beating its all-time high following the great financial crisis of $4.5 trillion and making its pre-2008 portfolio of about $800 billion seem downright quaint.  Of course, that’s not the only thing that now seems quaint about the old-world Fed.  Once upon a time, the Fed held its portfolio to fund its own open-market operations; now, its huge book not only executes fiscal policy, but also exerts the FOMC’s will via interest paid on trillions in bank reserves.  On December 23, these stood at $3.2 trillion, almost double the $1.7 trillion parked at the Fed at the close of 2019.  Congress has long been uneasy with interest on excess reserves (IOER).  Even though the Fed now seeks to rebrand it with an “interest on reserves” (IRR) moniker, the interest paid to big banks will come under sharp and bipartisan attack as the Fed’s portfolio grows ever larger and IRR amounts get still bigger.  Much as many on the Hill respect the Fed, there’s just so much money going to big banks that many of them won’t let it pass unnoticed or unwanted.

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