Tomorrow is President’s Day in the United States, so banks and the US government are closed for the holiday. Back on 9 January, I discussed the introduction of HR 146, Prohibition of IOER Act of 2025, a bill that would prohibit the payment of interest on reserve balances in excess of minimum requirements. During my first blog post on the bill, I mentioned that ascertaining the rationale for the bill would be difficult without a text being available. The text is now available and while I am a big fan of brevity, the text of HR 146 lacks any rationale for prohibiting interest payments.
The Board of Governors of the Federal Reserve System considers interest on reserve balances (IORB) an important tool for implementing monetary policy. According to the Board, paying interest on required reserve balances should eliminate the opportunity costs of holding required reserves while promoting efficiency in the banking sector.
The IORB is intended to set the lower bound of the federal funds rate, the rate that banks charge when lending each other their excess reserves. The IORB steers the federal funds rate, the primary monetary policy tool, into the target range set by the Federal Open Market Committee (FOMC).
Payment of the IORB was first authorized via the Financial Services Regulatory Relief Act of 2006, and took effect in October 2008.
Again, the text of HR 146 does not discuss whether payment of the IORB, particularly in the post Great Financial Crisis era, is still the appropriate monetary policy. Nor does the bill discuss two important components of the IORB; the reservation rate component, which establishes the IORB as the lowest rate banks are likely to accept for lending funds, and arbitrage, where the IORB is a factor for a bank determining whether to leave funds on deposit with a federal reserve bank and earn interest, lend excess funds in the fed funds market at the effective federal funds rate, or invest in Treasury bills.
No, a bill would usually not be this granular in describing the social policy it is trying to achieve but given the 15-plus year history of the policy tool and its impact on the market for fed funds, some detail in explaining the prohibition of payment would help congressmen and policy makers.
No hearing has yet been placed on the calendar of the US House Committee for Financial Services.
Alton Drew
17 February 2025
DISCLAIMER: I am not a financial adviser. These blog posts are for educational purposes only. Trading of any kind involves risk. Your trading decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary.
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