Congress Should End the Federal Reserve’s Interest Payments on Bank Reserves
Key Findings
- The Federal Reserve (Fed) will spend more than $1 trillion on interest payments to banks for their reserve balances over the next decade.
- Due to the Biden administration’s reckless inflationary policies, interest costs have skyrocketed.
- The Fed is supposed to remit earnings to the Treasury but has been operating at a loss since 2022 due to high interest payments.
- Repealing the Fed’s authority to pay interest on reserve balances would return the Fed to profitability, and the billions spent on interest could instead be remitted to the Treasury.
Background
The Federal Reserve was created by Congress in 1913 to create a safer and more stable monetary system.1 The Fed’s modern mandate is to use monetary policy to promote maximum employment and stable prices.2 In carrying out these functions, the Fed generates revenues and incurs expenses. The Fed’s net earnings are transferred to the U.S. Treasury, serving as an additional source of revenue for the federal government.3 However, the Fed’s expenses have exceeded its earnings since September 2022, and it has been operating at a loss.4
The primary sources of revenue for the Fed are interest income on securities that it owns and fees imposed on financial institutions.5 In 2024, the Fed brought in nearly $159 billion in interest income and $298 million in other fees and income.6
In 2024, the Fed’s expenses exceeded its income, largely due to interest payments.7 The expenses include nearly $10 billion in operational costs, including payroll and other administrative costs and nearly $40 billion in interest on securities sold under agreements to repurchase, which are referred to as repos.8 The Fed’s largest expense by far was paying interest to banks on the balances that they have in reserves.9 In 2024, this expense totaled more than $186 billion.10
Whenever the Fed’s losses exceed its income, it creates a deferred asset recognizing those losses and suspends remittances to the Treasury until those deferred losses are repaid.11 The Fed is currently operating at a loss and its remittances to the Treasury are effectively zero for the first time since 1934.12-13 The Congressional Budget Office (CBO) projects these deferred losses to continue for several years, as the Fed’s remittances to the Treasury will not reach normal levels until at least 2030.14
Interest payments on reserve balances cost billions and are causing the Fed to operate at a loss
The Fed’s interest payments on reserves are a relatively recent phenomenon. For its first 95 years of existence, the Fed did not pay interest to banks for balances held in reserve.15 Previously, banks were required to hold a certain percentage of their deposits in reserves at the Fed to ensure that they had adequate liquidity to meet withdrawal demand.16 The level of required reserves was also a tool that the Fed used to increase or decrease the money supply to influence interest rates as a part of enacting monetary policy.17 If reserve requirements were higher, banks had fewer funds to lend and interest rates would increase.18 When reserve requirements were lower, the money supply expanded and interest rates went down.19 Banks could also choose to hold additional balances in excess reserves at the Fed, rather than lending these funds to other financial institutions to accrue interest.20 In 2020, the Fed reduced the required reserve ratio to zero for all financial institutions and currently all reserves are excess reserves.21
The current lack of a reserve requirement is due to the Fed’s policy of paying interest on bank reserves.22 In 2006, Congress authorized the Fed to begin paying interest on reserve balances in 2011 and beyond.23 Congress accelerated that timeline during the Great Recession, allowing the Fed to start paying interest on reserves in October 2008.24
At the time, the Fed claimed it needed this authority to prevent interest rates from dropping too low while it was expanding its balance sheet and injecting liquidity into the market in the lead up to and during the 2008 financial crisis.25-26 Paying interest on reserves was supposed to encourage banks to hold more in reserves rather than engage in overnight lending among other financial institutions, which reduced downward pressure on the overnight federal funds rate.27
When Congress authorized the Fed to begin paying interest on reserves, CBO estimated that the policy would reduce remittances from the Fed by just $372 million per year.28 Instead, the policy has led to the Fed paying out more than $580 billion in interest on banks’ reserve balances between 2008 and 2024—money that would otherwise go to the Treasury.29 Nearly three-quarters of those interest costs accrued during the Biden administration.30
In 2024, the Fed paid more than $186 billion in interest payments to banks.31 These payments primarily flowed to the largest banks, which hold the most in reserves at the Fed.32 Additionally, at any given time, foreign banks account for between 40 and 50 percent of interest payments.33
It comes as no surprise that foreign banks would rather hold reserves with the Fed than other central banks—the European Central bank only pays two percent interest for overnight deposits, compared to 4.4 percent paid by the Fed.34-35 In total, reserve balances of $3.3 trillion are 14 percent of total commercial bank assets, which total more than $23 trillion.36-37 The primary source of revenue for banks is net interest, which is interest earnings minus interest costs. In 2024, net income for the banking industry increased to $268 billion, driven in part by higher net interest margins.38
When Congress initially granted the Fed the authority to pay interest on reserves, it was believed that the Fed would only pay interest on required reserves, not excess balances.39 When the Fed implemented the policy, however, it set interest rates for both required and excess reserves.40-41 In October 2008, the Fed set its interest rate for required reserves at 1.4 percent and the interest rate for excess reserves at 0.75 percent.42-43 By the end of 2008, the Fed had stopped setting different rates for required excess reserves, cutting both interest rates to 0.25 percent, where they remained for the next seven years.44-45 The Fed stopped setting separate rates altogether in July 2021 due to the elimination of required reserves.46
Due to the rapid inflation set in motion by the Biden administration’s reckless policies, the Fed’s interest rate hikes have been faster than any other in history.47
This rapid increase in rates has created a corresponding increase in the Fed’s costs to pay interest.48 In 2021, interest payments to financial institutions for reserve balances totaled just $5.3 billion.49 By the end of 2024, these interest costs had grown to more than $186 billion.50 Because the Fed’s assets are primarily long-term securities with fixed interest rates, revenue has not kept pace
with costs.51
Instead, the Fed’s costs are exceeding its income, which has caused the creation of a deferred asset—a negative liability equal to the cumulative value of the losses.52 The Fed holds the deferred asset as a liability against taxpayers until its revenue exceeds costs and then pays down the value of these losses before returning remittances to the Treasury.53 The value of the deferred asset reached $236 billion in July 2025.54 Losses by the Fed are a loss of revenue for the U.S. Treasury, worsening the national debt and burdening taxpayers.
Ending the Fed’s interest payments on reserves would reduce costs by more than $1 trillion
According to CBO, the Fed will be paying off these deferred losses until at least 2030, during which time the Treasury will continue to miss out on revenue.55 Even when the Fed is able to pay down the deferred losses and generate positive net income, it will continue to divert hundreds of billions each year to banks instead of to the Treasury.56 CBO projects that the federal funds rate, which closely tracks the interest on reserve balances, will gradually decline over the next 10 years, reaching 3.2 percent by 2035.57 As a result, the Fed is on track to spend more than $1 trillion in interest on bank reserves over the next 10 years.58
Senators Rick Scott (R-FL) and Ted Cruz (R-TX) have introduced legislation to end the Fed’s authority to pay interest on reserve balances.59 Eliminating interest payments on reserve balances would immediately stop the Fed from operating at a loss and return to making remittances to the Treasury. While remittances cannot be used to finance additional federal spending, they do reduce the national debt.60
Congress should be wary of trusting CBO’s analysis of the costs and savings that may result from changes to the way that the Fed pays interest on reserve balances, especially considering the inaccurate projection that CBO provided when Congress first authorized interest payments on reserve balances. Additionally, while CBO is supposed to be non-partisan, the reality is that nearly 80 percent of CBO staff are registered Democrats.61 Both of the two CBO analysts who work on projections related to the Federal Reserve are registered Democrats, as are more than half of the senior staff of the Federal Reserve System.62
To ensure that taxpayers reap the benefits of ending interest payments on reserve balances, Congress could require the Fed to spread repayment of the $236 billion deferred asset over the course of 20 to 30 years. Congress could also require the Fed to immediately remit all excess revenue to the Treasury going forward.
Ending interest payments on reserves would lower net interest costs
If the Fed stops paying interest on reserve balances, banks would be motivated to buy Treasuries rather than having excess reserves. This would place downward pressure on interest rates, helping to grow the economy. Instead of parking money at the Fed, banks would have an incentive to increase lending to help businesses grow and make financing more available to consumers.
Additionally, lower interest rates would reduce the cost of paying interest on the national debt.63 In 2024 alone, interest payments on the debt reached more than $880 billion.64 Currently, interest payments on the national debt are projected to exceed $13.8 trillion over the next 10 years.65 A 0.1 percent drop in interest rates each year would lower federal outlays by more than $350 billion over 10 years.66 Even larger reductions in interest rates would lead to trillions in savings.
The Bottom Line: Congress should revoke the Fed’s authority to pay interest on bank reserves to restore fiscal responsibility.
The Fed carried out its mandate for nearly 100 years without paying interest on bank reserves. While the policy to pay interest on required reserves was designed in the lead-up to the financial crisis, it was never expected to create a loss for the Fed, or to cost more than $100 billion each year. Paying interest on all reserve balances is the Fed’s largest expense and the Fed is not generating income that is sufficient to cover these costs. Repealing the Fed’s authority to pay interest on reserves would restore fiscal accountability and ensure that the Fed’s policies are benefiting taxpayers.
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