The Federal Reserve is one of the most powerful, secretive, and unaccountable institutions in U.S. history. Its insulation from oversight, combined with its massive coffers and strong statutory authorities, makes it a uniquely troubling institution.
To give you an idea of just how powerful the Fed is, in 2018, Forbes ranked Jerome Powell, the Chairman of the Federal Reserve Board of Governors, as the 11th most powerful person in the world, ahead of the prime ministers of France and the United Kingdom.
Earnest oversight is long overdue. Current law prohibits the Government Accountability Office from auditing the Fed’s vast monetary policy functions, and the Fed’s Inspector General serves at the pleasure of the Fed Board of Governors, the very institution it’s supposed to hold accountable.
This summer, I began investigating the Fed. After months of stonewalling, the Fed finally produced information on one of the most significant tools of monetary policy – Interest on Reserve Balances, or IORB.
The Interest on Reserve Balances system began after the 2008 Financial Crisis, when the Fed aggressively purchased assets to flood the market with liquidity. This marked the beginning of a transition from the scarce reserves regime to the abundant reserves regime.
The Fed vastly underestimated how this transition would play out. Initial estimates put the cost of transitioning at $35 billion. As of May 2022, those estimates increased to $2.3 trillion.
Under this new regime of abundant reserves, banks would receive interest payments, known as Interest on Reserve Balances, on deposits held in accounts at the Fed.
When interest rates are low and the Fed’s balance sheet is small, this is a manageable regime. Unfortunately, since 2008, both the size of the balance sheet and interest rates have increased the cost of this regime to unsustainable levels.
Take the size of the Fed’s balance sheet. Before 2008, it was approximately 5 percent of GDP. After the Great Financial Crisis, it rose steadily, reaching approximately 18 percent. During the COVID-19 pandemic, it soared to a record high of 35 percent in 2022. It has fallen since then to approximately 21 percent today, but remains well above historic levels.
When interest rates were near zero from 2010 to 2016, the Fed had to pay little in the form of Interest on Reserve Balances. But when inflation concerns required the Fed to raise interest rates from 2016 to 2019 and 2022 to 2023, the Interest on Reserve Balances rate was the primary tool to do so, requiring the Fed to increase the amounts it was paying to banks to get them to hold money at the Fed.
This led to distortions in Federal Funds markets, including periods where short-term Treasury yields were actually below the Interest on Reserve Balances rate. When this happens, the Fed loses money, and taxpayers underwrite the losses.
The Fed is supposed to send its profits to the Treasury. The Interest on Reserve Balances system, however, has led to two years of operating losses. The Fed is taking funds that would otherwise go to the taxpayer, and using them to make Interest on Reserve Balances payments to the largest banks in the world, both foreign and domestic.
It’s a double whammy for the taxpayer. Banks use your money that’s sitting in a checking account to earn up to 5.4 percent interest from the Fed, the payment of which is underwritten by your tax dollars, then pay you an average of 0.07 percent interest on checking accounts, and pocket the difference. Interest on Reserve Balances enables the Fed, without any form of oversight or elections, to unilaterally transfer wealth from the American taxpayer to the biggest banks on Wall Street.
Interest on Reserve Balances payments have totaled hundreds of billions of dollars, and most people don’t even know they exist. Since 2013, the Fed has paid $607 billion to both foreign and domestic banking institutions. In 2024 alone, the payments amounted to $186 billion, or about 10 percent of the Fiscal Year 2024 deficit. The secrecy surrounding the amounts of these payments have allowed unelected officials at the Fed to influence the American economy in ways that rival elected Members of Congress.
For the first time ever, the report I released this week revealed the true nature of these payments.
The data I obtained from the Fed shows that the largest banks in the country made a windfall. Big names like JP Morgan Chase, Bank of America, Citi, Wells Fargo, and U.S. Bank raked in tens of billions of dollars from holding your money in Fed accounts. From 2013 to 2024, Interest on Reserve Balances payments to those top five banks amounted to $136 billion, which equates to 12 percent of profits for these banks over the same period.
Money wasn’t just flowing to Wall Street. Foreign banks also cashed in. 11 of the top 20 recipients of Interest on Reserve Balances payments from 2013 to present were foreign banks. These funds aren’t exclusive to allied nations. Chinese banks alone received about $10 billion in Interest on Reserve Balances payments.
Oversight of the Fed’s Interest on Reserve Balances payments is the first step in finally auditing the Fed, but there is still much more work left. My “End the Fed’s Big Bank Bailout Act” would end the forcible transfer of wealth from average Americans to Wall Street institutions under the guise of Interest on Reserve Balances payments, while my “Federal Reserve Transparency Act” would allow meaningful oversight of all functions of the Fed, which is long overdue. If the Fed handed over this data, what is hiding in the information they still refuse to release?