A proposal to prevent the Federal Reserve from paying interest to banks would not save the government money nor make more credit available, Fed Chairman Jerome Powell said today.
Some members of Congress have proposed eliminating the Fed’s authority to pay interest on reserves. Asked about the proposal today during the Fed’s semiannual report to the Senate Banking Committee, Powell said implementing the policy would take years to execute “and it would be challenging and quite volatile.”
“We’re in an ample reserve framework now, and that’s a good thing,” Powell said. “That’s a result of the global financial crisis and the desire to have lots and lots of liquidity, and large liquidity requirements for our largest banks in particular. That enables banks to keep lending through stress.
“If you want to go back to a scarce reserve [framework], it would be a long and bumpy and volatile road,” he said. “I wouldn’t recommend that we take that road. It would not save any money — there is an illusion that it would save money, that is not the case. And it would not make credit more available. Having a lot of liquidity in the system — which is what goes with ample reserves — makes sure banks will continue to be able to lend.”
