U.S. Representative Warren Davidson, Republican of Ohio, last week fired across the bow of monetary policy by introducing HR 146, a bill to amend the Federal Reserve Act by prohibiting the payment of interest on excess reserves held at Federal reserve banks.
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Interest on excess reserves were authorized pursuant to the Financial Services Regulatory Relief Act of 2006. The Act, which amended 12 USC 461(b) of the Federal Reserve Act, allows Federal reserve banks to pay a rate on reserves that does not exceed the general level of short-term interest rates. Regulations that implement this statutory requirement are found at 12 CFR Part 204 (Regulation D).
The Board of Governors of the Federal Reserve System considers the payment of interest on reserve balances held at a Federal reserve bank to be an important part of monetary policy. Monetary policy aims to control the supply and demand for money by meeting the mandates of maximum employment, stable prices, and moderate long-term interest rates as described in 12 USC 225(a).
Assessing how a statutory prohibition against paying interest on reserve balances would impact monetary policy would not be complete without the text of the legislation which has not yet been published. That includes determining whether HR 146 recognizes the policy rational that supported paying interest on reserve balances and if so, whether another mechanism for achieving the policy goal is offered in the bill.
So far, HR 146 has no co-sponsors. Neither Representative Davidson nor Andy Barr, chairman of the House Sub-committee on Financial Institutions and Monetary Policy, have offered any public statements regarding the bill.
Alton Drew
9 January 2025
Show notes:
https://www.federalreserve.gov/supervisionreg/reglisting.htm
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