May 24, 2013 / 2:52 PM / in 5 years

UPDATE 1-Fed profits paid to U.S. Treasury slip in first quarter

WASHINGTON, May 24 (Reuters) - 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 balance sheet.

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 loss.

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 buying.

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.

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