1606 ET - Senator Ted Cruz has criticized the Fed's policy of paying interest on banks' reserves, arguing that the framework has contributed to recent Fed operating losses. Cruz says the Senate could prohibit the practice. Economists at Morgan Stanley write that the change wouldn't help much. For one thing, assuming no other policy changes, funds would likely flow out of banks and into money-market funds, which can park cash in the overnight reverse-repo facility, another Fed interest-bearing liability. Another option would be for the Fed to reduce the size of its balance sheet and go back to operating in a scarce-reserves framework, as it did before the financial crisis. But that would require significantly more quantitative tightening. The Fed's assets would fall, reducing its interest income as well. (matt.grossman@wsj.com, @mattgrossman)

(END) Dow Jones Newswires

June 10, 2025 16:06 ET (20:06 GMT)

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