Wednesday, July 21, 2010

Is the Fed Going to Stop Paying Interest on Excess Reserves, Today?

Not a chance.

There are over a trillion dollars in excess reserves. If the Fed stopped paying interest on excess reserve, all that money would come flying out of the Federal Reserve looking for a place to put the money to work.

It would more than double the money supply almost overnight.

Ben Bernanke understands this. Thus there is zero chance of this happening. Despite reports like this one:

There is talk going around that the Fed is going to suspend paying the interest on excess reserves, perhaps tomorrow during Bernanke’s testimony. Whether that does or does not happen, nobody knows. But as we outlined in our recent note on Deflation, ceasing paying IOER is a very quick and inexpensive (monetarily) way to attempt to spur economic activity, lending and an increase in asset prices. Hence, potentially, the rally in equities.

Dan Greenhaus
Chief Economic Strategist
Miller Tabak + Co.
(Thanks to A.)


  1. I doubt a reduction of 25bps is enough to get all the money flying out of the Fed. If the reason those reserves were there was for return, it would have been pulled out long ago. I'm sure some portion would come out, but certainly not all.

  2. Equities aren't rallying, potentially or otherwise. They're in a slow-motion tumble down an invisible set of stairs right now. Have we seen "higher highs"? No, we've seen "lower highs," so the idea of a stock market rally right now is yet another phantasm of deluded bulls.