By Michael S. Derby
New York (Reuters) -A Republican Senator Plan to take the authority of the Federal Reserve to pay banks on cash they park in the central bankbooks, can cause chaos for the implementation of monetary policy if it were implemented, said market participants.
In the past few days, Senator Ted Cruz of Texas has spoken about this power and his desire to see that it ends as part of what he regards as an attempt to save money by the federal government. Stripping the Fed of the Long -term Power would save the government $ 1 trillion, Cruz said in a CNBC interview last week. The senator then said that he did not know if it was likely that his efforts would work, but that it was certainly possible.
On Wednesday, Bloomberg reported that Cruz also lobbying about his idea about his idea with the Fed, as well as Republican colleagues. “We torture an attempt to find a $ 50 billion reduction here and there. This is more than a trillion dollar, large dollars in savings,” Cruz told Bloomberg and said about the payments: “Half goes to foreign banks, which makes no sense.”
The Cruz office did not respond to a request for comments. The Fed refused to comment.
The efforts of Cruz are carefully treated by Senator Tim Scott, the Republican from South Carolina, chairman of the Senate Finance Committee. “Although the desire to return to monetary policy procedures before the crisis is understandable,” Scott said in a statement, “Scott said in a statement. Every movement on it must start with a hearing, said Scott, adding:” This is not a decision to be hurried and openly be discussed. “
The authority of the FED to pay banks came into force in 2008, when the financial crisis came into force. It quickly became known as part of a large -scale overhaul of monetary policy architecture, while since the great depression the Fed confronted the greatest economic decline.
As it looks now, the Fed pays the banks with deposits with 4.4% for reserves. It uses another tool called the Reverse Repo facility to take cash from money market funds and others, which means they are paid 4.25%. Together, the two rates are designed to maintain the federal fund presentation, the main tool of the Central Bank to influence the economy, within the desired reach.
Paying financial companies for the actual cash loans is essential for interest rate control because of the very large amount of liquidity created by stimulation efforts in bonds. During the COVID-19 Pandemie, the FED doubled more than the size of its balance to a peak of $ 9 trillion, whereby assiva purchases offer support to the economy that goes beyond the near-zero short-term rates at the time.
