Why the Fed paying interest on reserves matters

The payment by the Federal Reserve of interest on bank reserves may sound like an abstruse matter of economic theory, but these payments are critical to bank operations and the Fed's conduct of monetary policy. In the latest  episode — sponsored by Intrafi's Banking with Interest — ABA's Jeff Huther discusses why proposals to end or reduce interest on reserves are misguided. Among other things, Huther discusses:

• Why ending payments could have a destabilizing effect on the financial sector.
• Why, under today's accounting practices, the federal government would see no near-term bottom-line boost from capturing those payments.
• How reducing or eliminating interest on reserves would disproportionately harm community banks.

Read more in Huther's ABA DataBank post.