Thursday, February 26, 2015

Caught in the Act: Janet Yellen Falsely Denying that the Fed is Paying Banks above Market Interest Rates

Justine Underhill, who is now an associate producer for Yahoo Finance's morning update show (the one Lauren Lyster used to host), caught what is surely one of the more important exchanges during Fed chair Janet Yellen's testimony before the Senate Banking Committee on Tuesday.

Underhill shows that although Yellen denied it in her testimony, the Fed is actually paying banks who can deposit funds at the Fed an interest rate significantly above market rates.

Underhill writes:
During the hearing Tuesday, Senator Pat Toomey (R-PA) probed Yellen about the central bank's plan to increase interest on excess reserves, as part of its process to normalize monetary policy. Yellen responded, “Well, remember that first of all, we will be paying banks rates that are comparable to those that they can earn in the marketplace, so those payments don't involve subsidies to banks.”

However, the Fed pays banks well above market rates, as measured by a closely-watched benchmark.

Banks yield a return of 25 basis points (0.25%) to keep their excess cash balances overnight at the Fed.  This is called interest on excess reserves (IOER). The General Collateral (GC) Repo rate is a comparable overnight “market” rate, and it is currently well below 25 basis points, according to data from DTCC Solutions.

Underhill concludes:
The chart above demonstrates that IOER is a multiple of the historical GC Repo rate, and as of Monday it was more than 4 times as high....

Keeping money at the Fed is deemed to be risk-free, and this safe storage usually comes at a premium. However, in the case of interest on excess reserves, the Fed pays a higher rate despite being the safest name in town...

Yellen is not the first Fed chairperson to give this response to the Senate. In February 2013, Ben Bernanke responded to Senator Bob Corker’s (R-TN) assertion that the Fed is subsidizing banks with its payments of IOER. Bernanke said (emphasis ours), “We’ll be paying market rates. We’ll be paying exactly what they would be getting in the repo market, the commercial paper market. There’s no subsidy involved.”


  1. If the Fed lowers IOER to below market, there would be an incentive for the banks to pull their excess reserves out of the Fed and start lending. That could spark rapid expansion of the money supply and price inflation, assuming willing borrowers. That is more worrisome than catching the Fed Head in another lie.

  2. Corker Says Auditing Fed Monetary Policy Harmful to ‘Free World’

    Bloomberg) -- Senator Bob Corker emphasized his opposition to a proposal to audit Federal Reserve monetary policy while calling for more transparency on how it regulates banks.

    “I can’t imagine anything worse for the nation

    or for the free world

    than for Congress to get involved in monetary policy,” Corker, a Tennessee Republican who sits on the Banking Committee, said during a Bloomberg breakfast in Washington on Thursday.

    and that is what they call doublespeak.

    1. Sounds like he's setting up a strawman. Nobody is arguing that congress should control monetary policy. Audit the Fed means just that. Take a look at the Fed's books and procedures to make sure they're on the level.