Free Money Calculation: Fed Will Give $36.93 Billion of Taxpayer Money to Banks

The Fed upped the interest it pays on excess reserves to 1.95% today. This is free money (taxpayer funded) to banks.

The Fed bumped up the interest it pays on excess reserves today to 1.95%. Currently, excess reserves sit at $1.894 trillion.

The math is simple enough. At the current rate, the Fed will hand over approximately $36.93 billion of taxpayer money to banks. That assumes the status quo, but things will change.


  1. The Fed is shrinking its balance sheet slowly. That reduces excess reserves the Fed pays interest rates on.
  2. When the Fed hikes interest rates, it also increases the interest it pays on excess reserves.

The first point acts to reduce free money, the second acts to increase free money.

Note to ECB

If you want to recapitalize Italian banks, just give them free money instead of your profit-reducing policy of holding rates negative.

Taxpayer money?

Yes! Otherwise the Fed would return this money to the US Treasury.

Some claim free money is paying banks to not lend. The claim is fallacious. Banks do not lend from excess reserves.

For discussion, please see Free Money! Banks Paid $22 Billion to Not Lend?

That was the amount I calculated on April 17, 2017. Interest then was 1.0%.

Even though the Fed's balance sheet is lower, the increased rate bumped up the free money calculation to $36.93 billion.

No Outrage!

Why isn't $36.93 billion in free money to banks an outrage?

Mike "Mish" Shedlock

Comments (7)
No. 1-7

Excess reserves are a potential source of inter-bank funding. With the amount of excess reserves still at a historically high level (the Fed is shrinking its balance sheet at a near-glacial pace), the Fed would not be able to achieve the increases in the Fed Funds target rate that it is now implementing because member banks would choose to borrow each others’ excess reserves at a lower rate instead. If you will notice, the rate of IOER was only raised 20 bps today - not 25. This is part and parcel of the slow “normalization” process. Until the Fed has significantly shrunk its balance sheet, it will have to continue to pay a rate of interest on excess reserves that is close to its Fed Funds target rate in order to be able to hit that target.


“Why isn't $36.93 billion in free money to banks an outrage?”

Joe Sixpack is going to be underwater on his mortgage if any actual normalization takes place. Perhaps he will express his outrage at that time.


it's news like this, coupled with news of increasing homelessness, that makes me want to projectile vomit


Give free money to city of Seattle. I bet they will find a good use for it.



Somehow I seem to have missed the "More Free Taxpayer's Money to Banks" in the Fed's announcement today.