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Genuine Free Money, Fed Style, Goes Straight to Banks

QE was not free money. Three rounds of fiscal stimulus by Congress was free money and so is this.
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Reserve balances courtesy of the New York Fed, chart by Mish

Reserve balances courtesy of the New York Fed, chart by Mish

The Fed used to pay interest on excess reserves. Now it pays interest on all reserves. The difference is actually moot.

Regardless, via QE the Fed forced reserves down the throats of banks, now sitting at roughly $3.875 trillion. 

In March, the Fed upped the rate it pays banks to 0.90%. 

Interest Rate on Reserve Balances (IROB)

Interest Rate on Reserve Balances 2022-05

You can calculate the annual free money banks get by multiplying the interest rate on reserves by the amount of reserves. 

At the current IROB banks get 0.90 percent of $3.875 trillion.

That's $34,875,000,000 ($34.875 billion).

Moving Target

The target is moving, however. 

IORB will likely move lockstep with the Fed Fund's rate but the Fed is doing Quantitative tightening which will lower the amount of reserves.

If we assume the Fed will hike a half point in June and July the IROB will likely rise to 1.90% 

The Fed will barely be into QT at that point and I expect the Fed to move much slower on mortgage QT than announced. 

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I will explain why in a subsequent post, but let's be generous and think the Fed will do $1 trillion in QT over the next year. 

Revised Calculation

1.90 percent of $2.875 trillion is $54.6 billion dollars, free money to banks.

That money would otherwise go to the US Treasury (taxpayers).

There is nothing "free" about "free money" of course. I just want to make a distinction between what has to be paid back (QE), and the amount of direct cash money via IORB that goes to banks that does not have to be paid back. 

When does someone who matters raise a big stink?

Free Money Chicago Style

In case you missed it, please note a free money trial is underway in Chicago. Expect an obvious failure to be touted as a huge success.

For details and discussion, please see Guaranteed Income Idiocy Easily Scales to Infinity, Actual Free Money Doesn't

This post originated at MishTalk.Com.

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