The media is fixated on President Donald Trump’s attempts to exert more control over the Federal Reserve. While we’re all in on changing the Fed’s leadership, the president has another opportunity to make the nation’s central bank work for, not against, the American people. He can support our bill, the Fiscal Accountability for Interest on Reserves Act, to end a pricey Fed policy that sends billions of dollars each year to big banks and squeezes working-class Americans with higher interest rates.
For nearly a century, the Fed paid zero interest on reserves that banks were required to keep. But when the financial crisis hit in 2008, Congress gave it immediate authority to pay interest on these cash balances that banks kept on deposit at the Fed overnight. That change has proven to be a serious mistake.
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When reckless Biden administration-era spending caused soaring inflation, the Fed responded by raising interest rates. This meant banks, including foreign banks, could earn much heftier returns with zero risk by depositing even more cash at the central bank, particularly as the Fed was shelling out at a 4.4% interest rate — more than double the rate paid by the European Central Bank.
Naturally, the cost of the program, once projected to be just $300 million annually, has exploded. Last year, the Fed shelled out $186.5 billion in interest payments. Astonishingly, over 40% of that went to foreign banks with zero return for taxpayers. Throughout former President Joe Biden’s term, the total amount of interest paid by the Fed to banks rose by more than 3,000% and amounted to almost half a trillion dollars.
The Fed is expected to send another $1 trillion to banks in the next decade, according to the Foundation for Government Accountability. Those payments ultimately come at taxpayers’ expense because the Fed has consistently run at a loss for years now, with total operating losses exceeding $236 billion.
When operating as intended, the Fed’s revenue stems from low-yield government bonds, with any profits going back to the U.S. Treasury to benefit the American people. That hasn’t happened in years. Instead, any revenue brought in by the Fed is offset by paying higher short-term interest to banks. If the Fed were a private bank, it could not afford to keep its lights on, let alone pay for its exorbitant $2.5 billion renovation project.
Most concerning, the Fed’s interest payments hurt every American. These dollars belong to taxpayers to invest in what matters to them and support their ambitions and success. Instead, they are going to support big banks, both here and abroad.
These payments inhibit our country’s economic growth and stifle business. Every dollar banks park at the Fed is a dollar they aren’t investing in local businesses, job creators, and communities. Talk to any small or mid-sized business owner, and they’ll tell you how difficult it is to access capital for starting or growing a business right now. This Fed-run interest payment program is undoubtedly making this crisis even worse. Rather than encouraging banks to engage in real financial intermediation, the current system allows them to do little while still earning profits padded by the Fed.
Our bill would end this farce. The FAIR Act repeals the Fed’s permission to make these interest payments — period. Big banks may scream and shout, but there’s no moral defense for a corporate welfare policy that bolsters the profits of the biggest banks in our country and abroad, all while depriving American companies and communities of the access to capital that they desperately need.
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If the FAIR Act were enacted, banks would likely respond by moving some Fed-parked cash into Treasury securities, putting downward pressure on yields. That would give Trump the de facto interest rate cut he rightly seeks. And since consumer loans are heavily influenced by short-term rates on government securities, Congress would have made life more affordable for families buying homes, cars, and other big purchases.
This reform is urgently needed and long overdue. The FAIR Act would end the Fed’s operating losses, lead to more federal revenue over the next decade, give job creators better access to capital, and bring down interest rates for everyday Americans. All of this would spark the growth that lifts everyone up and allows people to seize their American dream.
Rick Scott is a U.S. senator from Florida.
Ted Cruz is a U.S. senator from Texas.
