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

Making SensePaul Solman answers questions from NewsHour viewers and web users on business and economic news on his Making Sen$e page. Here is Thursday’s query.

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 Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._

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