This Month’s Chart Deck

U.S. Senator Ted Cruz of Texas made an off-hand remark during an interview this month with CNBC, where he floated the idea that Congress should ban the Fed from paying interest on reserve balances (IORB) to banks to help the U.S. pare down its deficit. Congress initially granted the Fed the ability to pay IORB in the Financial Services Regulatory Relief Act of 2006. This tool is a critical element of the Fed’s control over rates while also maintaining an abundant reserve policy.

The Federal Reserve earns interest primarily on its System Open Market Account (SOMA) portfolio of Treasury and Mortgage-backed securities, which totaled $6.4 trillion this month. It earns interest on $3.3 trillion in reserves and $0.5 trillion in reverse repos (RRPs), which account for 60% of the portfolio. The rate it pays out (4.4% for IORB and 4.3% for RRP) continues to exceed the rate it earns on SOMA, and the net difference accumulates on its balance sheet as a negative Treasury remittance balance, a liability of the Fed that it owes to the Treasury (Slide 1). Since 2022, IORB has become a significant contributor to the industry’s interest income (Slide 2). However, as the Fed began lowering rates last September, domestic banks reduced their reserve balances (Slide 3), which were subsequently picked up by foreign branches and agencies (Slide 4).

Money market funds grew to a record $7.4 trillion this month, which equals 29% of total U.S. savings, counting money market funds and commercial bank deposits (Slide 5). The increase reflects considerable disintermediation of the banking industry since 2017.

The Fed’s restrictive monetary policy during this rate cycle dampened demand for residential mortgage loans, especially among first-time homebuyers. Still, until the last couple of months (Slide 6), high rates have done little to cool soaring home prices. Meanwhile, the spread between 30-year mortgage rates and the 10-year Treasury widened in Q2 2025, with the rates market gripped by heightened uncertainty and market volatility (Slide 7).

Monetary policy may also be leading the surge in asset-backed securities issuance this year (Slide 8). Growing awareness of the opportunities to optimize credit risk through synthetic risk transfer transactions may also be driving the growing trend in ABS issuance. Meanwhile, poor returns on capital continue to encourage the banking industry to shift its loan mix out of residential mortgage loans (Slide 9). Bank treasurers are increasing their hedging activity to help maintain interest rate neutrality (Slide 10).