Is Fed Policy of Interest on Excess Reserves ‘Outrageous’?

BY Paul Solman  September 1, 2011 at 2:10 PM EDT

Name: Fred McEwan

Question: [A] Huffington Post article states that one huge reason for banks not lending is that the Fed pays them a quarter cent interest on all their held cash assets. If this is true, why would they risk lending? If this is true, wouldn’t your audience need to know about this? I’m sure most don’t and it should be categorized as outrageous.

Paul Solman: We reported on the Fed policy of IOER — interest on excess reserves — in some detail TWO YEARS AGO.

As I put it at the time: “the Fed pays a bit of interest, 0.25 percent, for re-deposits at the Fed. But, we asked Brian Sack, who runs the Fed trading desk in New York, isn’t the point of pumping reserves into the banks to get the money loaned out and moving through the economy?”

Another more painstaking account: The Fed Speech: Paul Solman Channels Ben Bernanke

And here’s one for good measure: Is the Fed a Scam?

“Outrageous”? My reaction exactly.

This entry is cross-posted on the Rundown- NewsHour’s blog of news and insight. Follow Paul on Twitter.