The monetary policy takeaway ….
GOP members of the U.S. House Committee on Financial Services are flexing their constitutional muscles on monetary policy. On 4 March 2025, the Committee’s Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity will hold a hearing on monetary policy and economic prosperity.
“The actions of the Federal Reserve and the machinery of monetary policy play an important role in economic stability,” said Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity Chairman Frank Lucas (OK-03). “With the 5-year review of the monetary policy framework underway, I hope this will be an opportunity to evaluate the effectiveness of the Fed’s tool kit and its vast influence on the lives of every American. The creation of the new task force will afford us the opportunity to dive deeper into this topic. There are real issues that deserve our attention.” — U.S. House Committee on Financial Services.
We are acquainted with President Trump’s desire to increase his influence on monetary policy. As I shared in an earlier blog post, HR 146, a bill that would prohibit payment of interest on reserve balances (IORB), could be a tactic used by congressional GOP members to influence rates.
According to the Board of Governors of the Federal Reserve System, reserve balances are balances held by depository institutions in master accounts and excess balance accounts at Federal Reserve Banks. The current rate of interest paid on these reserves is 4.40%.
Task force chairman Frank Lucas, Republican of Oklahoma, did not indicate whether HR 146 would be discussed at the hearing. The text of the bill itself provides no policy rational for discontinuing payment of IORB. Money sitting in bank vaults not being loaned out as an input to transactional activity begs the question, is there a demand for loanable funds in the U.S.?
The concept of IORB has its critics. For example, Judy Shelton, a senior fellow at the Independent Institute, in a recent interview suggested getting rid of the IORB. She believes that reserves could be invested in US Treasurys or loaned into the private sector.
Another critic of the IORB, George Selgin of the Cato Institute, considers interest on reserve balances to be a mechanism that prevents the expansion of money and the contraction of the economy. Speaking in 2016 on the contribution payment of IORB has on the economy during the Great Financial Crisis, Mr. Selgin argued that by reducing the amount of lending between banks, paying interests on reserves gave banks an incentive to keep money on the shelf which turned the sub-prime crisis into a general macroeconomic event.
Arguments supporting the payment of interest on reserves go back to the 1970s. Economist Milton Friedman recommended payment on required reserves in order to aid monetary policy which in turn would make it easier for the Federal Reserve to hit its fed funds rate target. The fed funds rate is the overnight rate that banks loan each other their excess reserves.
In 1998, former Federal Reserve governor Laurence Meyer, also a supporter of paying interest on reserve balances, argued that the interest payments made the banking system more efficient. Rather than incurring the costs of sweeping reserves into money market (nonreservable) accounts, for example, it would be more efficient to pay interest.
In a 2013 report on monetary policy, the Federal Reserve Bank of San Francisco centered its support for the IORB on its effectiveness in increasing the supply of reserves and helping the Federal Reserve control the fed funds rate. The FRB-SF also argued that by paying the IORB, the Fed’s ability to provide the banking system with liquidity increases along with the expansion of the Fed’s balance sheet.
But back to the politics of monetary policy. If prohibiting the IORB leads to banks either buying more Treasurys, and in particular new Treasury issues or leads to an increase in private sector lending, would the GOP risk creating an environment where the increase in money flowing through the system bids up consumer prices leading to further erosion in spending power?
The GOP seems so rigidly focused on the Fed’s diversion into social issues, i.e., DEI, climate change, and ESG (Environmental Social Governance) that prohibiting IORB or pursuing any other intervention into monetary policy could create uncertainty for investors in short term money markets.
The data …
U.S. Treasury rates
On 21 February 2025, the two-year, ten-year, and thirty-year Treasury rates moved down between the opening and close of the trading day. According to Treasury data, the two-year decreased from 4.28% to 4.19%. The ten-year rate fell from 4.50% to 4.42%, while the 30-year rate fell from 4.74% to 4.67%.
Board of Governors of the Federal Reserve System
According to data released on 18 February 2025 from the Board of Governors, the EUR/USD is priced at 1.0498 while the USD/JPY is priced at 152.2500.
Federal Reserve Bank of New York reference rates, foreign exchange intervention
The Effective Federal Funds Rate for domestic unsecured borrowings between commercial depository institutions is at 4.33%. The Overnight Bank Funding Rate, a measure of wholesale, unsecured overnight bank funding costs, also held at 4.33%.
The Secured Overnight Financing Rate, which measures the cost of borrowing cash overnight secured by Treasury securities, came in at 4.33%, while the Broad General Collateral Rate, a measure of rates on overnight Treasury general collateral repurchase agreement transactions, came in at 4.31%.
The Tri-Party General Collateral Rate, a measure of rates on overnight, specific counterparty, tri-party general collateral repurchase agreement transactions, came in at 4.31%.
U.S. Congress
HR146, a bill prohibiting payment of interest on reserve balances, is currently with the United States House Committee on Financial Services.
HR 692, a bill that requires the United States executive director at the International Monetary Fund, to advocate for increased transparency with respect to exchange rate policies of the People’s Republic of China, is currently with the United States Senate Committee on Foreign Relations.
Alton Drew
22 February 2025
If you are in need of consultation on the impact of the current legal environment on the Federal Reserve and the interbank market, reach out to me at altondrew@altondrew.com to make an appointment. The hourly fee is $175 per hour.
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.
AFFILIATE DISCLOSURE: Some of the links on this channel are affiliate links, meaning at no cost to you I earn a commission if you click through and make a purchase.
Lawyers Write the Bets. Bankers Sell the Bets. 