Federal Reserve Sends $77 Billion in Profits to Treasury
Yesterday, in the preliminary assessment of its 2011 balance sheet, the Federal Reserve reported that it would be sending $77 billion in 2011 profits back to the U.S. Treasury. While this is down slightly from the record high of $79 billion sent to Treasury in 2010, it is still a much larger return than in any other year in the 2000s, and more than double the average annual remittance of $36 billion over the 2000-2011 period ($28 billion average if 2010 and 2011 are excluded).
The amount remitted to Treasury each year is less than its total interest income, reportedly $83.6 billion for 2011. The difference represents operating expenses of the Fed and its 12 Reserve Banks, and other costs that include operation of the Consumer Financial Protection Bureau and Office of Financial Research, both created by the Dodd-Frank financial reform act.
Recently, a decent-sized chunk of that income is coming from the Fed’s activities to reduce business and individual borrowing costs, and through Operation Twist. Under these efforts, the Fed is keeping interest rates low by buying up Treasuries. Critics say that this circular strategy – the Fed buys Treasuries, garners interest income, and remits most of those profits back to the Treasury – is somewhat nonsensical. The Fed argues that it is one of the best strategies they have to keep interest rates low without any of the profits leaking out of the country to foreign investors.
Further, while the Fed’s income and profits have increased substantially in recent years, there are fears that future interest rate increases could hurt the Fed’s bottom line if payments to banks on their reserves exceeded the Fed's income on its holdings.
That said, the Fed is not, and does not claim to be, in the business of turning a profit. And with real (inflation adjusted) interest rates currently around 0 percent, the Fed continues to employ some complicated and extraordinary methods in its efforts to use monetary policy to support the economy and encourage individuals and businesses to get their dollars back into the economy as well.