U.S. Markets

Fed 2017 profit payments to Treasury fall to $80.2 billion

WASHINGTON (Reuters) - The U.S. Federal Reserve said on Wednesday that its remittances to the U.S. Treasury for 2017 are expected to fall to $80.2 billion in part because of a rise in the interest the central bank pays to financial institutions.

FILE PHOTO: The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/File Photo

In its preliminary estimate of its 2017 results, the Fed also said the interest paid by the Fed to major banks last year rose to $13.8 billion.

For 2016, the Fed sent $91.5 billion to the Treasury Department. The Fed regularly transfers remittances, which are derived from profits on its bond holdings, to the Treasury in what amounts to payments to U.S. taxpayers.

It transferred a record $97.7 billion in 2015 but the amount has declined since then and should continue to do so as the central bank winds down its $4.4 trillion balance sheet.

Policymakers began that process in October, which could also help insulate the Fed from potential future losses on its bond holdings and political criticism.

The Fed’s bond holdings jumped after the financial crisis as it bought Treasury and mortgage bonds to encourage U.S. investment, hiring and economic growth.

The increase in payments to financial institutions is a result of the interest paid on excess reserves held by commercial banks at the 12 regional Federal Reserve institutions. Banks are required to hold some reserves, but are allowed to deposit more if they choose.

Total reserves held by banks have risen to historic levels since the 2008 financial crisis with more than $2 trillion parked at the central bank.

The Fed raised its benchmark interest rates three times in 2017 as part of a tightening cycle that began in late 2015.

It last raised rates in December by a quarter of a percentage point to a range of 1.25 percent to 1.50 percent.

Each time it raises its benchmark lending rate it also pushes up the rate its has to pay banks, which has previously drawn criticism from lawmakers who criticize the Fed for paying money to large banks.

The Fed argues that by offering interest on excess reserves, the Fed forces banks to raise the rate at which they are willing to lend to each other and so pushes rates higher.

Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama