H.R.146 - Prohibition on IOER Act of 2025 (119th Congress)
Summary
H.R. 146, the "Prohibition on IOER Act of 2025," aims to amend the Federal Reserve Act to prohibit Federal Reserve Banks from paying interest on excess reserves (IOER). The bill was introduced in the House of Representatives by Mr. Davidson and referred to the Committee on Financial Services.
The core provision of the bill modifies Section 19(b)(12) of the Federal Reserve Act (12 U.S.C. 461(b)(12)) to restrict the payment of earnings only to required reserve balances. This effectively eliminates the Federal Reserve's ability to pay interest on excess reserves held by depository institutions.
The short title of the bill is the "Prohibition on IOER Act of 2025".
Expected Effects
If enacted, this bill would eliminate the Federal Reserve's ability to use interest on excess reserves as a monetary policy tool. This could impact how the Fed manages inflation and bank liquidity.
The change could lead to banks altering their reserve management strategies. It might also influence the overall supply of credit in the economy.
The long-term consequences would depend on how the Federal Reserve adapts its other monetary policy tools in response to this restriction.
Potential Benefits
- Potential Reduction in Government Spending: Eliminating IOER could reduce the amount the Federal Reserve pays to banks, potentially increasing remittances to the Treasury and reducing the federal deficit.
- Reduced Moral Hazard: Some argue that paying interest on excess reserves encourages banks to hold excess reserves rather than lending, potentially hindering economic growth. This bill could incentivize lending.
- Simplified Monetary Policy: Some believe that eliminating IOER would simplify the Federal Reserve's monetary policy framework.
- Increased Scrutiny of Federal Reserve Policies: This bill could spark further debate and oversight of the Federal Reserve's actions.
- Potential for Increased Bank Lending: By removing the incentive to hold excess reserves, banks might be encouraged to lend more, potentially boosting economic activity.
Most Benefited Areas:
Potential Disadvantages
- Reduced Monetary Policy Flexibility: Eliminating IOER could limit the Federal Reserve's ability to manage monetary policy effectively, particularly during economic downturns or financial crises.
- Potential for Increased Volatility: Without IOER, banks might be less willing to hold excess reserves, potentially leading to greater volatility in the money markets.
- Risk of Unintended Consequences: Changes to the Federal Reserve's tools could have unforeseen impacts on the financial system and the broader economy.
- Reduced Bank Profitability: Banks that rely on IOER as a source of income could see their profitability decline, potentially leading to reduced lending or other adjustments.
- Possible Impact on Financial Stability: Removing a tool used to manage bank reserves could potentially destabilize the financial system, especially during times of stress.
Constitutional Alignment
The bill appears to align with the Constitution, specifically Article I, Section 8, which grants Congress the power to coin money and regulate the value thereof. This implies congressional authority over the monetary system, including the Federal Reserve.
There are no apparent violations of individual liberties or rights as outlined in the Bill of Rights. The bill focuses on regulating the financial system rather than infringing on personal freedoms.
However, some might argue that limiting the Federal Reserve's tools could indirectly affect the general welfare, a concept mentioned in the Preamble. The extent of this impact would depend on the actual economic consequences of the bill.
Impact Assessment: Things You Care About ⓘ
This action has been evaluated across 19 key areas that matter to you. Scores range from 1 (highly disadvantageous) to 5 (highly beneficial).