Cruz Plan to End Fed Interest Payments Sparks Market Fears
Senator’s Proposal Could Disrupt Monetary Policy, Experts Warn
A proposal by **Senator Ted Cruz** to eliminate the Federal Reserve’s authority to pay interest on bank reserves is raising concerns among financial experts, who predict potential chaos for monetary policy and question the promised savings. The move, pitched as a way to cut federal spending, faces skepticism from within his own party.
Cruz Pushes for Trillion-Dollar Savings
**Senator Cruz** has publicly advocated for ending the practice, claiming it would save the government over $1 trillion. He reportedly lobbied both former President **Donald Trump** and fellow Republicans, arguing that a significant portion of these payments—roughly half—go to foreign banks, a situation he deems illogical. “We’re agonizing trying to find a $50 billion cut here and there. This is over a trillion dollars, big dollars in savings,”
**Cruz** told Bloomberg.
**Cruz**’s office has not responded to requests for comment, and the Federal Reserve declined to address the proposal.
Cautious Response from Senate Finance Chair
**Senator Tim Scott**, chair of the Senate Finance Committee, expressed caution, emphasizing the need for thorough consideration. “While the desire to return to pre-crisis monetary policy operating procedures is understandable,”
**Scott** stated, “this is not a decision to be rushed – it must be carefully considered and openly debated.”
He called for a formal hearing before any action is taken.
The ability to pay interest on reserves was granted to the Fed in 2008 during the height of the financial crisis, becoming a crucial tool for managing monetary policy. Currently, the Fed pays banks 4.4% on reserves and 4.25% through its reverse repo facility, helping to maintain the federal funds rate within its target range.
Impact on Rate Control and Bank Subsidies
Experts warn that removing this tool could severely hamper the Fed’s ability to control short-term interest rates, particularly given the large amount of liquidity in the market resulting from past quantitative easing programs. The Fed’s balance sheet peaked at $9 trillion during the COVID-19 pandemic, requiring these tools to effectively manage monetary conditions. According to the Congressional Budget Office, the national debt currently stands at over $34.7 trillion ( CBO, November 2023), highlighting the pressure to find cost-saving measures.
Some analysts also point out that paying interest on reserves can be seen as a subsidy to banks. Furthermore, the current interest rate environment has led the Fed to operate at a loss, as the interest paid on reserves exceeds the income earned from its bond holdings. These losses reduce the amount of profit the Fed can remit to the Treasury.
Analysts Predict Limited Savings, Market Disruption
Economists at Barclays Capital argue that ending interest payments on reserves would simply shift funds into the reverse repo facility, negating any potential savings. J.P. Morgan strategists similarly warned that **Cruz**’s plan “may be compromised, complicating its efforts to guide broader financial conditions via the fed funds rate and other money market rates.”
They believe it would create significant instability in money markets.
The debate over the Fed’s powers underscores the ongoing tension between fiscal responsibility and the need for effective monetary policy in a complex economic landscape.
