Sens. Rick Scott of Florida and Ted Cruz of Texas have called for significant changes to the Federal Reserve’s current interest payment policy. In an opinion piece, they urge President Donald Trump to support their proposed legislation, the Fiscal Accountability for Interest on Reserves (FAIR) Act, which aims to end the Fed’s practice of paying interest on bank reserves.
According to Scott and Cruz, the policy shift began in 2008 during the financial crisis when Congress allowed the Fed to pay interest on cash balances that banks keep at the central bank overnight. They argue that this change has resulted in large sums being paid out by the Fed—last year alone, $186.5 billion was distributed as interest payments, with more than 40% going to foreign banks.
They note that “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.”
The senators point out that these payments come at a cost to taxpayers because “the Fed has consistently run at a loss for years now, with total operating losses exceeding $236 billion.” Under normal circumstances, any profits from Fed operations would go back to the U.S. Treasury; however, Scott and Cruz state that “that hasn’t happened in years. Instead, any revenue brought in by the Fed is offset by paying higher short-term interest to banks.”
They further claim that this policy discourages banks from investing in local businesses and communities: “Every dollar banks park at the Fed is a dollar they aren’t investing in local businesses, job creators, and communities.”
The FAIR Act would repeal what Scott and Cruz call a “corporate welfare policy,” ending permission for these interest payments entirely. They argue this would prompt banks to move cash into Treasury securities instead of keeping it at the Fed, which could lower yields and potentially reduce consumer loan rates tied to government securities.
“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,” they wrote.
Scott and Cruz believe their bill will address what they see as an urgent problem: “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.”
Both senators emphasize their position that changing this policy will benefit American families and businesses while reducing costs associated with federal monetary operations.
