JPMorgan "Escapes" from the Federal Reserve's $350 billion assault on US Treasuries

JPMorgan Chase has withdrawn nearly $350 billion in cash from its Federal Reserve account since 2023 and has allocated most of it into U.S. government bonds. This move is a defensive strategy the bank has adopted to counter the threat of rate cuts that could erode its profits.

According to data compiled by industry tracking agency BankRegData, as of the third quarter of this year, this bank, with assets exceeding $4 trillion, has seen its balance at the Federal Reserve plummet from $409 billion at the end of 2023 to just $63 billion.

During the same period, the bank increased its holdings of U.S. Treasuries from $231 billion to $450 billion. This operation allowed it to lock in higher yields in advance to hedge against Fed rate cuts.

These fund transfers reflect how the largest U.S. bank is preparing for the end of a period of easy profits, during which banks could earn returns simply by holding cash at the Fed while paying minimal interest to most depositors.

JPMorgan Chase shifts cash from the Federal Reserve to U.S. Treasuries

In 2022 and early 2023, the Federal Reserve rapidly raised its benchmark federal funds rate target from near zero to over 5%. The central bank then began to lower its target range at the end of 2024 and has hinted at further rate cuts. This month, the Fed lowered interest rates to their lowest level in three years.

“Clearly, JPMorgan Chase is moving funds from the Fed into Treasuries,” said Bill Moreland, founder of BankRegData. “Interest rates are falling, and they are acting proactively.” JPMorgan Chase declined to comment.

The bank has not disclosed the maturity profile of its U.S. Treasury holdings nor the extent to which it uses interest rate swaps to manage risk. During 2020 and 2021, when interest rates were low, JPMorgan Chase avoided large investments in long-term bonds, unlike competitors such as Bank of America, which suffered significant paper losses when rates surged in 2022. At that time, JPMorgan Chase’s stable deposit base allowed it to earn returns on cash held at the Fed during high-rate periods that exceeded the costs paid to depositors.

10-year U.S. Treasury yield exceeds the Federal Reserve’s reserve interest rate

The latest move from cash to Treasuries before rate cuts helps lock in higher yields, thereby limiting the impact of falling rates on profits. JPMorgan Chase’s withdrawal scale is so large that it offsets the total change in the holdings of the remaining 4,000+ U.S. banks at the Fed. Since the end of 2023, the total deposits of banks at the Fed have decreased from $1.9 trillion to about $1.6 trillion.

Since 2008, banks have earned interest on cash deposited at the Fed, providing the Fed with a mechanism to influence short-term interest rates and liquidity in the financial system. However, in the past two years, interest payments have surged, reaching $186.5 billion in 2024 as interest on reserves.

Interest paid by the Fed to banks skyrockets

The Fed’s practice of paying interest on reserve balances has been controversial. In October, the U.S. Senate voted to reject a bill aimed at banning the Fed from paying this interest. Senator Rand Paul, who pushed for the change, argued that the Fed is paying banks hundreds of billions of dollars while funds sit idle. Other Republican senators, including Ted Cruz and Rick Scott, also voiced opposition.

In a report earlier this month, Paul claimed that since 2013, the top 20 recipients of Fed interest payments have received a total of $305 billion, with JPMorgan Chase earning $15 billion in 2024 alone, while the bank’s total profit for that year was $58.5 billion.