LIVE MARKETS-Proposal to end Fed’s interest payments to banks would shift costs

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

PROPOSAL TO END FED’S INTEREST PAYMENTS TO BANKS WOULD SHIFT COSTS

U.S. Sen. Ted Cruz has proposed ending the Federal Reserve’s ability to pay banks interest on reserves they hold at the U.S. central bank as a means of reducing the U.S. budget deficit.

But analysts say this would have unintended consequences including impeding the Fed’s ability to control interest rates. They further say that the move would lead to higher payments elsewhere and could push up longer-term Treasury yields.

Deutsche Bank says that a drop in reserves would need to be made alongside an offsetting decline in Fed assets, which presently comprise 63% Treasuries and 32% mortgage-backed securities.

Pushing Treasuries off the Fed’s balance sheet and into the private sector would result in the U.S. government having to pay higher interest on the debt.

"A decline in reserves offset by reduced Treasury holdings is equivalent to a terming-out of the federal government’s debt," Deutsche said. "This terming-out would put upward pressure on term premia and stand at odds with the administration's expressed interest in keeping longer-term yields down."

Meanwhile, Barclays Capital that there are currently around $3.3 trillion in bank reserves at the Fed, and if the U.S. central bank cuts interest payments much of this would move elsewhere. And that would most likely be into the Fed's overnight reverse repo agreement operations.

"The Fed's interest expense would likely stay high as it would shift from payments to banks on reserves to payments for cash in the ONRRP," the bank said.

(Karen Brettell)

EARLIER ON LIVE MARKETS:

CONSUMERS CHEER UP WITH TARIFFS ON PAUSE: UMICH EXPECTATIONS JUMP NEARLY 22% CLICK HERE

US INDEXES DOWN 1% EACH AS ISRAEL-IRAN CONFLICT WEIGHS; ENERGY UP CLICK HERE

DEGLOBALIZATION ISN'T A THREAT, IT'S A TRADE, BERNSTEIN SAYS CLICK HERE
CRUDE OIL FUTURES RUN-UP, BUT SO FAR REPULSED BY RESISTANCE CLICK HERE

EUROPE'S AUTOS MALAISE TO CONTINUE UNTIL OUTLOOK CLEARER CLICK HERE

OIL MOVES SHAKE UP RISK OFF CURRENCIES CLICK HERE

WHERE NEXT FOR OIL PRICES CLICK HERE

AIRLINE STOCKS FALL, ENERGY GAINS CLICK HERE
EUROPE BEFORE THE BELL: FUTURES TUMBLE ON ISRAEL'S STRIKE ON IRAN CLICK HERE