"On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on excess reserve balances ("IOER") as well as required reserves. They began doing so three days later.[3] Banks had already begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008, to $880 billion by the end of the second week of January, 2009.[4][5] In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. Former U.S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances.[6]
The day before the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."[7] The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target,[7][8] and again on November 5 for the same reason.[9]
The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:
| Year | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Millions of dollars | 0 | -192 | -192 | -202 | -212 | -221 | -242 | -253 | -266 | -293 | -308 |
| (Negative numbers represent expenditures; losses in revenue not included.) | |||||||||||
0.25% simple interest on $800 billion is $2 billion, not $202 million [LOLWUT???] as shown for 2009. But those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreased economic activity from damage to the short-term commercial paper and associated credit markets."
At the end of January, 2009, excess reserve balances at the Fed stood at $793 billion[18] but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion. By August 2011, they had reached $1.6 trillion.[19]
On March 20, 2013, excess reserves stood at $1.76 trillion.[19] As the economy began to show signs of recovery in 2013, the Fed began to worry about the public relations problem that paying dozens of billions of dollars in IOER would cause when interest rates rise. St. Louis Fed president James B. Bullard said, "paying them something of the order of $50 billion [is] more than the entire profits of the largest banks." Bankers quoted in the Financial Times said the Fed could increase IOER rates more slowly than benchmark Fed funds rates, and reserves should be shifted out of the Fed and lent out by banks as the economy improves. Foreign banks have also steeply increased their excess reserves at the Fed which the Financial Times said could aggravate the Fed’s PR problem.
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