WASHINGTON May 24 Federal Reserve profits paid
over to the U.S. Treasury dipped somewhat in the first quarter
compared to a year ago, unaudited quarterly results for the U.S.
central bank showed on Friday.
The Fed transferred $15.3 billion in the first quarter
versus $23.8 billion in the same period in 2012, reflecting a
decline in earnings from both interest and non-interest income.
The U.S. central bank returns portfolio profits to the
Treasury each year and it has never missed a payment. Last year,
remittances hit a record $89 billion thanks to its bloated
The Fed has more than tripled the size of its balance sheet
to around $3.3 trillion since late 2008 due to a campaign of
massive bond purchases to hold down borrowing costs, which is
aimed at spurring the pace of U.S. growth and hiring.
The Congressional Budget Office estimates it will contribute
some $95 billion a year to federal coffers through 2016. But
remittances are expected to hit zero from 2018 through 2020,
before resuming in 2021.
Fed profits could slump or vanish altogether when the
central bank eventually exits from ultra-easy monetary policies,
if it is forced to sell bonds from its balance sheet at a steep
A loss by the Fed, while not meaningful in an economic
sense, could pose a serious political liability that might
expose the central bank to unwelcome scrutiny from U.S.
lawmakers, some of whom have been heated critics of the bond
As interest rates rise when the Fed tightens monetary
policy, the value of the bonds that it now holds will decline.
This would not matter if the Fed is able to hold the bonds
until maturity. Indeed, Fed Chairman Ben Bernanke told Congress
on Wednesday that he thought it might be a good idea for the Fed
to hold on to the mortgage-backed securities it owns until they
mature, rather than selling them in the market.
But if the Fed wants to shrink the balance sheet at a faster
pace, in order to withdraw credit from the economy to keep
inflation under control, it may have to sell bonds which could
force it to realize a loss.
Another way that Fed income might be dented is if it decides
to pay banks a higher rate of interest on their excess reserves
than it earns on its own assets. It might do that to discourage
banks from pouring those reserves into credit markets, which
could also fan inflation.