Lawmakers want to keep Fed dividend rate at 6 percent

A bipartisan group of more than 140 House members have signed a letter to House leadership expressing their concern that leadership might seek to pay for a federal transportation bill by lowering the interest rate banks’ receive from Federal Reserve dividend investments.

House leaders are considering lowering the 6 percent interest rate to pay for extending the federal transportation fund, which is set to expire Oct. 31.

Reps. Bill Huizenga (R-Mich.) and Bill Foster (D-Ill.) are circulating a letter to House leaders, obtained by The Hill, “to raise concerns regarding legislative proposals that would reduce dividend payments on required Federal Reserve stock.”

The more than 90 House Republicans and 40 House Democrats who have already signed the letter want to stop any Congressional talk of lowering the rate “until there is greater examination of the issue and an understanding of the implications that such a statutory change might have on the banking system.”

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) requested that the non-partisan Government Accountability Office (GAO) study the issue.

Shortly after the Fed was created in 1913, Fed officials incentivized banks to join the federal system by requiring them to invest in the central bank with a guaranteed 6 percent interest rate.

For decades, the stock purchase has been used as a way for banks to become invested in the U.S. banking system.

Lawmakers were successful at thwarting a similar measure in the Senate in July. Senate Majority Leader Mitch McConnell (R-Ky.) and Sen. Barbara Boxer (D-Calif.) wanted to lower the rate to 1.5 percent.

Federal Reserve Chairwoman Janet Yellen raised concerns about the issue in July when she testified before the Senate Banking Committee.

“I would be concerned that reducing the dividend could have unintended consequences for banks’ willingness to be part of the Federal Reserve system — and this might particularly apply to smaller institutions,” Yellen said.

Yellen, a President Obama appointee, said lowering the rate could pose a threat to small community banks.

“[It] would likely be a significant concern to the many small banks that receive this dividend,” she said in the July hearing. “This is a change to the law the could conceivably have unintended consequences, and I think it deserves some serious thought and analysis.”

“Until GAO completes its work and the congressional committees of jurisdiction have an opportunity to review the significant public policy questions at issue, we believe that changes to the Federal Reserve dividend rate are premature,” the lawmakers wrote in the letter, which was sent to Speaker John Boehner (R-Ohio) and House Minority Leader Nancy Pelosi (D-Calif.).