Fed’s Growing Balance Sheet Generates $76.9B for Treasury

The Federal Reserve said Tuesday that it transferred $76.9 billion in profits to the U.S. Department of the Treasury last year, the second-highest amount in the central bank’s history.

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Fed profits, which by law must be transferred to the Treasury each year, have soared in recent years as a result of the central bank’s ongoing campaign to stimulate economic growth, and by law must be transferred to the Treasury

The Fed has been buying up record amounts of securities in an effort to reduce borrowing costs and long-term interest rates.It is not only the largest single holder of federal debt, but also of securities issued by Fannie Mae and Freddie mac.

Interest payments on $2.5 trillion in holdings of Treasury securities and mortgage-backed securities accounted for 97 percent of the Fed’s income last year — that means roughly $74.6 billion in taxpayer dollars flowed from the Treasury to the Fed and then back to the Treasury last year in a process that actually saved them money, as those interest payments would otherwise have been made to other investors.

In the five years preceding the financial crisis, the Fed made an average annual contribution of $23 billion to the Treasury Department. But after the financial crisis, the scale of the transfers grew rapidly, with the Fed’s average contributing more than doubling to $54 billion in the five years since 2007.

In 2010, the Fed transferred $79.3 billion, setting a new record just $1.4 billion above the figure for 2011. Though its investment portfolio continued to grow in 2011, profits were down somewhat as the Fed reduced its holdings of some more profitable investments while expanding its holdings of low-yield government debt.

Because the Fed can simply create money at no cost rather than paying for funding, the return on its investments almost all flows directly to the bottom line. Revenues are tapped to cover the cost of the central bank’s own operations, as well as the Consumer Financial Protection Bureau and the Office of Financial Research.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com