The simple version

Commercial banks hold accounts at the Federal Reserve, and the balances in those accounts are called reserve balances. That is where a large share of the banking system's uncommitted money sits.

The Federal Reserve pays interest on those balances. That rate is not a courtesy. It is one of the main instruments the Fed uses to steer short-term interest rates across the economy, because a bank has little reason to lend anywhere else at less than it can earn sitting still.

The numbers

• More than 5,000 depository institutions maintain accounts at the Federal Reserve Banks, and they hold balances in those accounts to make and receive payments (Board of Governors of the Federal Reserve System)
• Those balances are also referred to as reserves, and depository institutions earn interest on the end-of-day balances they hold at the Federal Reserve (Board of Governors of the Federal Reserve System)
• The interest rate paid on reserve balances is 3.65%, effective July 30, 2026 (Federal Reserve, FOMC implementation note, July 29, 2026)
• The federal funds target range is 3.50% to 3.75%, unchanged at that same July 2026 meeting (Federal Reserve, FOMC implementation note, July 29, 2026)
• Reserve balances with Federal Reserve Banks averaged $2,894,531 million, or roughly $2.89 trillion, for the week ended September 2, 2026 (Federal Reserve, H.4.1 released September 3, 2026)
• Banks typically are unwilling to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Fed, so an increase in that rate puts upward pressure on a range of short-term interest rates (Board of Governors of the Federal Reserve System)
• JPMorgan Chase has withdrawn almost $350 billion in cash from its account at the Federal Reserve since the end of 2023, cutting that balance from about $409 billion to about $63 billion while raising its Treasury holdings from about $231 billion to about $450 billion, which the bank did to lock in yields ahead of expected rate declines (Financial Times, using data compiled by BankRegData)
• A bank choosing where to hold uncommitted money is comparing what the Fed pays against what it could earn elsewhere at comparable risk (definition)

Why the account exists at all

Reserve balances predate any question about interest. The Fed's own description of why banks hold them is one sentence long: they hold balances in those accounts to make and receive payments. When a customer at one bank pays a customer at another, the two institutions square up by moving balances between their accounts at the Fed, which is the mechanism we covered in detail when the Fed proposed a new payment account earlier this year.

Why the rate is a policy tool

Paying interest on those balances turns a piece of plumbing into a lever, and the logic is worth following because it explains how a central bank moves rates without ordering anyone to do anything.

A bank with money to place has options. It can lend to businesses, buy securities, lend to another bank overnight, or leave the money at the Fed. The Federal Reserve describes what happens next plainly: banks typically are unwilling to lend to any private counterparty at a rate lower than the rate they can earn on balances maintained at the Fed.

That sets a floor. In the Fed's words, an increase in the rate it pays will put upward pressure on a range of short-term interest rates, and the opposite holds for a decrease. It is a price rather than a rule, and banks respond to it the way anyone responds to a price.

It also explains why a bank might move money out. If Treasury securities are yielding more than the Fed is paying, or are expected to yield less later, the calculation changes. The Financial Times reported this week, using data compiled by BankRegData, that JPMorgan Chase has drawn its Fed balance down by almost $350 billion since the end of 2023 and put the money into Treasuries. That is a shift over roughly two years rather than a single transaction, and whether similar reasoning applies to any other institution is not something an article can determine.

The Real Cost lens on the floor under everything

This is bank plumbing rather than a household matter, and the connection is real but indirect enough to state carefully.

• The rate the Fed pays banks sets a floor under what banks will accept for short-term lending, which shapes short-term rates across the economy
• Those rates influence what a bank is willing to pay a depositor and what it charges on short-term credit, though a bank sets its own deposit rates and is under no obligation to pass anything through
• That last gap is why a savings account rate can lag the Fed's moves substantially in both directions
• Nothing here is a reason to act on anything, and no household transacts in reserve balances

The useful part is knowing the floor exists. When people ask why a bank pays so little on savings while charging so much on credit, part of the answer is that the bank has a completely safe alternative earning the Fed's rate, and every other use of its money competes against that.

What this means

Monetary policy is often described as the Fed setting a rate, which sounds like an announcement. A large part of it is the Fed setting a price on a completely safe alternative and letting every other rate arrange itself around that.

The broader idea is that financial systems have plumbing, and the plumbing is where the policy actually operates. The headline is a rate decision. The mechanism is an account, a price, and a set of institutions comparing their options.

What this is NOT

This is not a prediction of interest rates, Federal Reserve decisions, or bank behavior. This is not an evaluation of JPMorgan Chase or any institution, and the reported drawdown appears as a dated example attributed to reporting rather than as a subject. This is not a claim about why any institution acted beyond the reason the reporting states. This is not a position on the size or composition of the Federal Reserve's balance sheet, which is contested. This is not advice about banking, saving, or any financial decision, and it is not advice about any security or fund. Rates and balances change and the Federal Reserve's published figures govern. This is not investment or financial advice of any kind.

Sources

• Board of Governors of the Federal Reserve System, Federal Reserve liabilities (deposits of depository institutions): https://www.federalreserve.gov/monetarypolicy/bst_frliabilities.htm
• Board of Governors of the Federal Reserve System, why the Federal Reserve pays banks interest: https://www.federalreserve.gov/faqs/why-is-the-federal-reserve-paying-banks-interest.htm
• Board of Governors of the Federal Reserve System, interest on reserve balances: https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm
• Board of Governors of the Federal Reserve System, FOMC implementation note, July 29, 2026: https://www.federalreserve.gov/newsevents/pressreleases/monetary20260729a1.htm
• Board of Governors of the Federal Reserve System, H.4.1 factors affecting reserve balances: https://www.federalreserve.gov/releases/h41/