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WASHINGTON – The Federal Reserve said Tuesday that it transferred $76.9 billion in profits to the Treasury Department last year, slightly less than its 2010 transfer but much more than in any other previous year.
The Fed is required by law to transfer its profits to the Treasury each year, a provision that has become increasingly lucrative as a byproduct of the central bank’s ongoing campaign to stimulate economic growth.
Almost 97 percent of the Fed’s income was generated by interest payments on its $2.5 trillion in holdings of Treasury securities and mortgage-backed securities, which it has amassed in an effort to reduce borrowing costs for businesses and consumers by reducing long-term interest rates.
Through those purchases, the central bank has become the largest single holder of federal debt, and of securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from the pockets of taxpayers.
But Fed officials note that this recycling – payments flowing from Treasury to the Fed and then back to the Treasury – still saves money for taxpayers because those interest payments otherwise would be made to other investors.
“It’s interest that the Treasury didn’t have to pay to the Chinese,” the Fed’s chairman, Ben S. Bernanke, half-jokingly told Congress last year.
The scale of the transfers grew rapidly after the financial crisis.
The Fed made an average annual contribution to the Treasury Department of $23 billion during the five years preceding the financial crisis. In the five years since 2007, the Fed’s average contribution more than doubled to $54 billion.
The Fed transferred $79.3 billion in 2010. Its investment portfolio grew again in 2011, but profits were down somewhat as the Fed reduced some more profitable investments, like its support for the insurance company American International Group, and expanded its holdings of low-yield government debt.
Notwithstanding its conservative investment portfolio, the central bank remains highly profitable because of its unique business model. Rather than paying for funding, it simply creates the money that it needs at no cost. The return on its investments, as a result, almost all flows directly to the bottom line.
The Fed’s revenues are tapped to cover the cost of its own operations, including its expanded role as a regulator of the largest financial companies and most important markets.
The 2010 law overhauling financial regulations also requires the Fed to provide funding for two new agencies, the Consumer Financial Protection Bureau and the Office of Financial Research. The bill totaled $282 million last year. Other federal financial regulators are funded by the industries that they oversee. Both systems are intended to shelter regulators from political pressure.
The results reported Tuesday are preliminary. The 12 regional banks that comprise the Federal Reserve system will produce final results in a few months. If there is a change in estimated profits, the Fed will adjust the payments that it is making to Treasury this year. The payments are made on a weekly basis.
Fed Returns $77 Billion in Profits to Treasury - Yahoo! Finance
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