* Unrealized result was a $53 bln loss due to market drop
* Potential political lightning rod for U.S. central bank
(Adds unrealized loss, politics, background from previous year)
By Jonathan Spicer
NEW YORK, April 17 The Federal Reserve logged
$84 billion in net profit last year on its massive portfolio of
assets, and average income will probably remain higher than
before the financial crisis for another decade to come,
according to an annual report.
While the New York Fed's report on its open market
operations, released on Thursday, painted an optimistic picture
of what could be a thorny political issue for the U.S. central
bank, it noted that the portfolio would have logged an
unrealized loss of $53 billion had the Fed been forced to "mark
to market" its assets, as private firms do under law.
It was the first time the Fed formally acknowledged
unrealized losses. But since it is not required to use current
market prices in its accounting, and it did not sell any assets,
for now the Fed continues to transfer profits to the government.
The Fed has swollen its overall balance sheet to more than
$4 trillion since the depths of the financial crisis in 2008 to
lower borrowing costs across the economy, and to encourage
hiring and growth.
"The large size of the SOMA portfolio (System Open Market
Account), its considerable holdings of longer-term securities,
and the low interest rates paid on the Federal Reserve's
interest-bearing liabilities continued to generate high
portfolio net income, which totaled $84 billion in 2013," the
The profit falls just short of the $89 billion the central
bank logged in 2012. That year, when prices in the overall bond
market were still rising, the unrealized result was not a loss
but a gain of $215 billion.
The Fed's mandate is for low and stable inflation and
maximum sustainable employment, and says nothing about
generating profits or losses. But it turned to unconventional
policies, including asset purchases, to battle the 2007-2009
recession, and is currently buying $55 billion in Treasuries and
mortgage bonds each month.
The political risk for the Fed is that it will start to
realize losses if it sells the bonds in the years ahead, as bond
markets drop as expected. Lawmakers who want to clamp down on
the central bank's independence could point to the losses as
reason to do so.
But Fed Chair Janet Yellen and other policymakers have said
they do not intend to have to sell the mortgage bonds on the
balance sheet, and may not sell Treasuries either, electing
instead to let them mature.
The report, citing current expectations for the portfolio
and interest rates, said "net income is projected to remain
higher than pre-crisis levels, on average, through 2025 in the
current baseline projection and many alternative scenarios."
In another potential political headache, the Fed pays banks
interest on their excess reserves to help it keep a firm grip on
overall short-term borrowing costs. Last year those payments
totaled $5 billion, up from $4 billion in 2012, the report said.
The New York branch of the Fed, which does all of its
buying, expanded its System Open Market Account to $3.8 trillion
at the end of 2013, from $2.8 trillion a year earlier. It said
the market appeared to absorb the heavy buying without
(Reporting by Jonathan Spicer; Editing by James Dalgleish)