Ending Fed power to pay interest on reserves won’t save money: Powell

Federal Reserve Chairman Jerome Powell said Wednesday any move to strip the US central bank of its power to pay interest on reserves would be difficult and could rather aggravate the risk of volatility in the financial and banking sectors.

"If you were to want to go back to scarce reserves, it would be a long and bumpy and volatile road," Powell told a Senate committee during testimony.

He continued, "I wouldn't recommend that we undertake that road" and if it were done it "would not save any money."

Powell, speaking before a Senate panel, was discussing a power the central bank implemented in 2008 that allows it to pay deposit-taking banks interest for cash they park on the central bank's books. The power gained unexpected prominence in the financial crisis after the central bank slashed its interest rate target to near zero levels and began buying bonds in large amounts to provide additional stimulus to the economy.

That shift was a fundamental change in how the central bank implemented monetary policy. Prior to 2008 the Fed kept reserves in the system scarce and used regular interventions to keep the federal funds target rate in line. After 2008 reserve levels exploded due to bond buying and the Fed kept its target rate in line with its interest-paying powers.

Powell's remarks today came in response to a proposal made earlier this month by Senator Ted Cruz, who claimed that ending the system would save America as much as $1.1 trillion in interest payments over a decade.