foreign central banks

Clients will recall that, during his first term, Donald Trump nominated Judy Shelton, a frequent monetary-policy commentator, to the Federal Reserve Board.  However, her nomination sparked outrage among Congressional Democrats and many pundits that doomed confirmation.  Ms. Shelton nonetheless remains a trusted adviser to many with the President’s ear, making renomination and, this time, confirmation a strong possibility should Ms. Shelton still want a seat on the Board of Governors.  We thus took notice when she last week posted an attack on the payment of interest by the Fed on balances held by foreign branches and agencies.  She drew in part on another post adding foreign central banks to the complaint.  This might seem a remote or even improbable concern, but so does much else in CEA head Stephen Miran’s proposal positing a “user tax” that’s now in the House reconciliation bill attacking foreign investors.  Ms. Shelton’s complaint should thus be taken very seriously, especially given all the other demands to curtail interest on reserve balances (IORB).

Ms. Shelton finds that foreign branches and agencies get 42 percent of interest payments from the Fed, or about $78 billion based on total interest payments to banks of $186 billion in 2024.  Rates now on IORB stand at about 4.4 percent – one of the very best deals on offer for super-safe, overnight funds.  Another post calculates interest payments to foreign central banks at around $16.5 billion a year.  In short, it’s a lot of money which the posts rightly say …