Jeremy Siegel Backs Ted Cruz's Plan To End Fed Interest Payments On 'Excess Reserves,' Potentially Saving $2 Trillion In Deficits: 'Not A Trivial Concern'

After Sen. Ted Cruz (R-Texas) pushed for abolishing the interest paid by banks on their deposits with the Federal Reserve, senior economist Jeremy Siegel supported his arguments, whereas the JPMorgan Chase & Co. strategists opposed the idea, warning of serious implications.

What Happened: Cruz, while speaking to CNBC on June 5, suggested that the Federal Reserve should eliminate paying interest on reserve balances (IORB), which could save nearly $2 trillion worth of the ballooning federal deficits over the next decade.

Siegel, from WisdomTree and a former professor at the University of Pennsylvania, suggested that this political interest in the Fed's operating regime was a “potentially underappreciated development.”

According to him, “This is not a trivial concern. The Fed's shift from a profit-contributing institution to a deficit-expanding one may provoke greater scrutiny of its operating framework.”

The Federal Reserve should shift from its current “ample reserve” regime to a “scarce reserves” regime that would eliminate the need for large interest payments on excess reserves, explained Seigel.

Additionally, he said that “Fed's current operating protocol has gone very wrong in the last 15 years.”

However, according to a Bloomberg report, strategists at JPMorgan warned that abolishing IORB would make it difficult for banks to manage liquidity, and they would have to shift cash to money markets. thus, crowding out existing participants in Treasury bills, repurchase agreements, and fed funds.

Their analysis also highlighted that profitability would likely decline, and holding reserves would become more costly for banks.

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Why It Matters: The central bank started paying interest on reserves in 2008, which was initially slated to begin in 2011 but moved forward after the Global Financial Crisis.

"In essence, the absence of IORB could jeopardize the Fed's control over money market rates, complicating its monetary policy efforts in guiding broader financial conditions through the fed funds rate and other money market rates," Teresa Ho told Bloomberg.

Price Action: The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, were higher in premarket on Tuesday. The SPY was up 0.095% at $600.25, while the QQQ advanced 0.14% to $531.43, according to Benzinga Pro data.

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