Fears at Fed of Rate Payouts to Banks

US Federal Reserve officials fear a backlash from paying billions of dollars to commercial banks when the time comes to raise interest rates.

The growth of the Fed’s balance sheet means it could pay $50bn-$75bn a year in interest on bank reserves at the same time as it makes losses and has to stop sending money to the Treasury.

Officials at the US central bank fear it could create a public-relations nightmare after the Fed was lambasted for rescuing banks during the financial crisis. It is one factor prompting some inside the Fed to reconsider the eventual “exit strategy” from easy monetary policy.

In an interview with the Financial Times, James Bullard, president of the St Louis Fed, said: “If you think of the profitability of the biggest banks, if you’re going to talk about paying them something of the order of $50bn – well that’s more than the entire profits of the largest banks.”

Mr Bullard said that neither interest paid to banks nor possible losses on exit made any difference to the substance of monetary policy.

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