Proposed Fed policy pushes banks to consider charging for deposits

Top U.S. banks are threatening to charge customers for depositing money in their vaults if the Federal Reserve decides to slash interest payments on the money they loan to the federal government.

The Financial Times spoke with leaders at two of the top five American banks about the Federal Reserve’s intention to lower interest rates on the excess bank reserves it holds. They warned that if the Fed cuts the interest it pays for the trillions it borrows from private banks, banks will have to pass that cost on to companies and consumers seeking to deposit their money.

“Right now you can at least break even from a revenue perspective,” one executive said, explaining that the interest earned from checking and savings accounts counteracts what they pay to the government for deposit insurance. But if the Fed cuts the rate they pay to banks, it “would turn it into negative revenue — banks would be disincentivized to take deposits and potentially charge for them.”

The Fed is considering the move to offset a likely reduction in money being pumped into the economy, instead lowering the rates consumers pay for loans. But the policy will likely backfire if it forces banks to charge for depositing money, since consumers would then have less to spend and invest.

Last week the Fed hinted that it’s finally prepared to ease off of “quantitative easing,” the policy through which the central bank effectively prints $85 billion in new money each month. But policymakers remain concerned that a cutback in “easy money” could depress an economic recovery they claim is just beyond the horizon.

Because Keynesian economists insist that the federal government always promote greater access to credit during a recession, officials at the Fed want to lower the 0.25 percent interest rate paid out to banks for the $2.4 trillion in private assets held by the Federal Reserve. Such a move would lower the interest rates banks pay to lend excess money to each other, supposedly making it easier for companies and consumers to afford a loan despite a (barely) shrinking money supply.

Published notes from the Fed’s October policy meeting show that most top officials found an interest rate reduction “worth considering at some stage,” although they admitted the benefits to such a reduction would be “small” and possibly only worth pursuing “as a signal of policy intentions.”

Janet Yellen, the Obama administration’s nominee as the next Fed chair, has indicated she’s open to the idea. “It is something we could consider going forward,” she told the Senate Banking Committee two weeks ago. “It certainly is a possibility.”

Financial markets have reacted fearfully any time the Fed has threatened to shut off the money spigot. But while banks have profited immensely from “easy money” policies like quantitative easing, their pushback against lower interest rates shows they will resist any loosening of credit that hurts their bottom line.

Yellen seems to recognize this. She recently told lawmakers that despite the benefits, the Fed has typically ruled out decreasing interest payments to banks. “We’ve worried that if we were to lower that rate close to zero,” she explained, “we would begin to impair money-market function.”

Even before the banks pushed back, St. Louis Fed President James Bullard predicted the Federal Reserve would maintain interests rates on their excessive reserves as they are. “Unless there was some special situation, some special circumstance, I don’t think we would go ahead with that part of the policy,” he told Bloomberg last week.

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