Fed's interest payments to banks hit $178B in 2023, raising conflict concerns

The Federal Reserve paid banks $178 billion in 2023. This includes $116 billion in interest on reserves and $62 billion on repurchase agreements, up from just $5.5 billion in 2021, according to data compiled by Yahoo Finance. The explosion in payments stems from the Fed's aggressive rate-hiking cycle, which lifted the federal funds rate to a 22-year high and triggered massive interest expenses on the trillions of dollars in reserves that banks hold at regional Federal Reserve banks. The payments flow directly to the banks that are legal shareholders of the 12 regional Federal Reserve banks, creating what critics describe as an inherent conflict of interest. Each regional Fed has a board of nine directors, six of whom are elected by member banks. The Federal Open Market Committee (FOMC), which sets interest rates, includes four regional bank presidents on a rotating basis alongside seven Fed governors and the New York Fed president. The arrangement means the institutions receiving the payments also have a hand in setting the rates that determine the size of those payments. This structure, dating back to the 1913 Federal Reserve Act and the secret 1910 Jekyll Island meeting where six men drafted the blueprint, is now drawing renewed scrutiny as the Fed's interest expense has ballooned to levels that dwarf its operating costs and have pushed the central bank into a $114 billion loss in 2023, halting its payments to the U.S. Treasury.

The $178 billion payment breakdown

The $178 billion total for 2023 breaks into two distinct streams: $116 billion in interest on reserve balances (IORB) and $62 billion in interest on overnight reverse repurchase agreements (ON RRP). The IORB rate, set by the FOMC, is the primary tool the Fed uses to keep the federal funds rate within its target range. Banks earn this rate on the reserves they hold at their regional Federal Reserve bank. The ON RRP facility, by contrast, is available to a broader set of counterparties including money market funds, government-sponsored enterprises, and primary dealers. The $62 billion paid through repos in 2023 reflects the Fed's effort to drain excess liquidity from the financial system by offering an attractive overnight rate to non-bank institutions. By 2024, the interest on reserves alone had climbed to over $168 billion, according to the same data series, as the Fed maintained elevated rates and banks continued to hold large reserve balances. The payments have become a major line item on the Fed's income statement, larger than its operating expenses, its currency costs, and its payments to the Treasury combined. In 2021, when the federal funds rate was near zero, the Fed paid just $5.5 billion in interest on reserves. The 30-fold increase in three years has transformed what was once a minor accounting entry into a massive transfer from the central bank to the commercial banking system.

How bank shareholders profit from the Fed's rate decisions

Banks are the legal shareholders of the 12 regional Federal Reserve banks, a structural feature that dates to the founding of the Federal Reserve System in 1913. Each regional Fed has a board of nine directors: three Class A directors elected by member banks to represent the banking industry, three Class B directors elected by member banks to represent the public, and three Class C directors appointed by the Fed's Board of Governors. The Class A directors, the ones elected by and representing banks, have direct input into the selection of each regional bank's president, who then participates in FOMC meetings and votes on interest rate policy. The FOMC itself has 12 voting members: the seven Fed governors in Washington, the president of the New York Fed, and four of the remaining 11 regional bank presidents on a rotating basis that changes each January. This means that at any given FOMC meeting, a significant portion of the voting power rests with individuals whose institutions are elected by the very banks receiving the interest payments. The conflict is not merely theoretical. When the FOMC raises rates, it increases the interest payments flowing to banks. When it holds rates high, those payments continue at elevated levels. The banks that elect the directors who select the regional presidents who vote on rates are the same banks that receive the $168 billion-plus in annual interest payments.

The competitive distortion between large and small banks

The interest-on-reserves regime creates a competitive distortion that favors large money-center banks over smaller community banks. Large banks hold the vast majority of the $3 trillion-plus in reserve balances in the system, meaning they receive the overwhelming share of the $168 billion in annual IORB payments. JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo collectively hold hundreds of billions of dollars in reserves at their regional Federal Reserve banks, earning the IORB rate on every dollar. Smaller community banks, by contrast, often hold fewer reserves relative to their assets and are more reliant on lending income. The IORB payments effectively provide a risk-free return to large banks that is funded by the Fed's creation of reserves through quantitative easing. The payments also reduce the incentive for large banks to lend into the real economy, since they can earn a competitive return simply by holding reserves at the Fed. This dynamic has drawn criticism from community bank advocates who argue that the Fed's interest payments disproportionately benefit the largest institutions while doing little to support lending to small businesses and households. The $62 billion in repo payments further compounds the distortion, since money market funds, which are heavily intermediated by large bank asset management divisions, are the primary counterparties in the ON RRP facility. The net effect is a system in which the Fed's monetary policy tools funnel tens of billions of dollars annually to the largest financial institutions, reinforcing their competitive advantage over smaller players.

The downstream impact on Treasury funding and fiscal policy

The Fed's $114 billion loss in 2023, driven primarily by the interest payments to banks, has a direct downstream effect on the U.S. Treasury. Under normal circumstances, the Fed remits its profits to the Treasury, contributing tens of billions of dollars annually to federal revenue. In 2022, the Fed paid $76 billion to the Treasury. In 2023, that number dropped to zero as the Fed's interest expenses exceeded its income from its securities portfolio. The loss is an accounting construct, and the Fed can continue to operate with negative equity, but it has real fiscal consequences. The Treasury must now borrow more to cover the shortfall, adding to the federal deficit at a time when interest costs on the national debt are already at record levels. The $114 billion loss in 2023 represents a direct transfer from the Treasury to the banking system, mediated by the Fed's interest payments. If the Fed had not raised rates, the Treasury would have received those funds. Instead, the banks received them. The payments in 2023 and 2024 alone totalled over $340 billion, combining the $178 billion in 2023 and the $168 billion-plus in interest on reserves in 2024, a figure that does not include the repo payments for that year. The fiscal impact has attracted attention from lawmakers on both sides of the aisle, with some questioning whether the Fed's governance structure, in which banks elect the directors who select the regional presidents who vote on rates, creates an incentive for the central bank to keep rates higher for longer than necessary, benefiting banks at the expense of taxpayers.

The policy signal from the Fed's governance structure

The 1910 Jekyll Island meeting, where six men including Senator Nelson Aldrich and Wall Street bankers drafted the blueprint for the Federal Reserve, established a system designed to balance public and private interests. The resulting legislation created a central bank with a hybrid governance structure: the Board of Governors in Washington is a government agency with presidentially appointed and Senate-confirmed members, while the 12 regional Federal Reserve banks are private corporations with boards of directors elected by member banks. The system has endured for over a century, but the explosion in interest payments has exposed a tension that was always latent in the design. The regional bank presidents who vote on the FOMC are selected by boards that are majority-elected by the banks that receive the interest payments. The rotating voting structure, with four of 11 regional presidents voting each year, means that the composition of the FOMC changes annually, but the underlying governance structure remains constant. Critics including Wall Street Journal columnists Greg Ip and James Mackintosh have written about the conflict, noting that the Fed's interest payments now exceed the combined profits of many large banks. The policy signal is clear: the Fed's governance structure, designed in an era when interest on reserves was zero, is now operating in a regime where those payments are a material source of bank income. The structure creates a bias toward higher rates, since the banks that benefit from those rates have a voice in setting them.

The FOMC's composition changes each January as new regional bank president seats rotate in. The Wall Street Journal reported on which 12 Fed officials will set rates in 2026, noting that the rotating seats shift the balance among regional presidents. Four of the 11 regional bank presidents hold voting seats at any given time, with the New York Fed as a permanent member. The seven Fed governors, appointed by the President and confirmed by the Senate, are the only FOMC members without structural ties to the banking shareholders who elect the regional directors. That 8-to-4 governor-to-regional-president voting ratio is the central bank's primary safeguard against the conflict.

The Fed's interest payments to banks will remain a flashpoint as long as rates stay elevated. The $168 billion paid in 2024 sets a new baseline that will be difficult to reduce without cutting rates, which the Fed has signaled it is reluctant to do until inflation is firmly under control. The conflict of interest embedded in the Fed's governance structure is not new, but its scale is unprecedented. As the Fed continues to run losses and the Treasury forgoes billions in remittances, the pressure for structural reform will grow. The Jekyll Island blueprint needs a 21st-century update.