Money for nothin’ (and your checks for free)

December 24th, 2015 at 9:35 am

I’m not trying to pull anyone out of the holiday spirit but you ought to know about this nifty bit of “carry trade” the banks have going right now, as per this piece from the WSJ. Since the Fed is now paying 0.50% interest on bank reserves held in their vaults—this is one way they’re targeting the new, higher Fed funds rate of 0.25%-0.50%–and banks can borrow overnight at 0.35%, there’s a 0.15% spread to be had. Foreign banks with branches here get the full spread, while domestics get less—about 0.07%–because they have to pay an FDIC fee.

An analyst cited in the piece estimated that the increase in IOER (interest on excess reserves) “will increase the Fed’s interest payments to banks to about $13 billion annually, assuming reserves stay at the same level.”

It’s a sweet freakin’ deal, you ask me (candidate Bernie Sanders complained about this in yesterday’s NYT). Like I said, it’s the holiday season and one doesn’t want to go to the negative place, but I’d like to think about how to claw these back through a tax on excess profits. Of course, that could undermine the Fed’s IOER tool, which is relatively new, so I need to think this through. But it’s a good e.g. of how some people have to bust their a__ to make ends meet, while others just have to move piles of money around.

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6 comments in reply to "Money for nothin’ (and your checks for free)"

  1. Joseph Gagnon says:


    Sanders overstated the case. Fed has to pay interest on its liabilities to tighten policy. But it does not have to pay banks more than anyone else can get. The subsidy is just over $2 billion/year.

    • Jared Bernstein says:

      Agree–and noted in my post that any fix needs to be mindful of this point. Liked your post but you suggest a pretty complex set of fixes! I’m doubtful that you can fine tune this policy such that there’s no subsidy.

  2. Michael Ettlinger says:

    We could use the revenue from your new tax to pay for the Cadillac Tax postponement!

  3. Len says:


    Dear Dr. Bernstein,

    Happy Holidaze.

  4. Bruce Webb says:

    “there’s a 0.15% spread to be had” “It’s a sweet freakin’ deal, you ask me”

    Yeah because you can’t make that sweet, sweet squeeze in the Payday and Title Loan biz.

    I am a knothead, Jared is brilliant. So lets get that out of the way. But somebody here seems to have some confusion between ‘stock’ vs ‘flow’ and ‘nominal return’ and ‘ROI’. And I am not sure the reliance on the ‘stock’ of Fed member banks reserves and the billions of dollars of ‘nominal return’ quite captures the reality here.

    Yeah Fed member banks earn billions on trillions. But not all ‘illions’ are created equal.