At taxpayer expense: easiest, risk-free, sit-on-your-ass profit ever.
The Federal Reserve’s income from operations in 2017 dropped by $11.7 billion to $80.7 billion, the Fed announced today. Its $4.45-trillion of assets – including $2.45 trillion of US Treasury securities and $1.76 trillion of mortgage-backed securities that it acquired during years of QE – produce a lot of interest income.
How much interest income? $113.6 billion.
It also made $1.9 billion in foreign currency gains, resulting “from the daily revaluation of foreign currency denominated investments at current exchange rates.”
For a total income of about $115.5 billion.
Those are just “estimates,” the Fed said. Final “audited” results of the Federal Reserve Banks are due in March. This “audit” is of course the annual financial audit executed by KPMG that the Fed hires to do this. It’s not the kind of audit that some members in Congress have been clamoring for – an audit that would try to find out what actually is going on at the Fed. No, this is just a financial audit.
As the Fed points out in its 2016 audited “Combined Financial Statements,” the audit attempts to make sure that the accounting is in conformity with the accounting principles in the Financial Accounting Manual for Federal Reserve Banks. Given that the Fed prints its own money to invest or manipulate markets with – which makes for some crazy accounting issues – the Generally Accepted Accounting Principles (GAAP) that apply to US businesses to do not apply to the Fed.
This annual audit by KPMG reveals nothing except that the Fed’s accounting is in conformity with the Fed’s own accounting manual.
Here is what the banks Get:
The Fed pays the banks interest on their “Required Reserves” and on their “Excess Reserves” at the Fed. Excess Reserves are the biggie: As a result of QE, they jumped from $1.7 billion in July 2008, to $2.7 trillion at the peak in September 2014. They’ve since dwindled, if that’s the right word, to $2.2 trillion:
When the Federal Open Markets Committee (FOMC) meets to hash out its monetary policy, it also considers what to do with the interest rates that it pays the banks on “Required Reserves” and on “Excess Reserves.” In this cycle so far, every time the Fed has raised its target range for the federal funds rate (now between 1.25% and 1.50%) it also raised the interest rates it pays the banks on “required reserves” and on “excess reserves,” which went from 0.25% since the Financial Crisis to 1.5% now:
So the amount of excess reserves has fallen since 2014. But the interest rate that the Fed pays on them has been ratcheted up since December 2015. And so has the amount that the Fed pays the banks. In 2017, a year with three rate hikes, the interest that the Fed paid the US banks and foreign banks doing business in the US jumped by $13.8 billion to $25.9 billion.
That $25.9 billion is the easiest, most risk-free, sit-on-your-ass profit that banks ever made in the history of mankind. More on that in a moment – particularly out of whose pocket this comes.
The Fed also paid banks $3.4 billion in interest on securities sold under agreement to repurchase.
What else needs to be taken care of?
The 12 Federal Reserve Banks cover their own operating expenses of $4.1 billion. Plus, there are these items, among others:
- $724 million for the costs related to producing, issuing, and retiring currency.
- $740 million for expenses associated with the Fed’s Board of Governors.
- $573 million to fund the operations of the Consumer Financial Protection Bureau
Oh, and the dividend…
The Fed paid $784 million in statutory dividends to the financial institutions that own the 12 Federal Reserve Banks.
US Treasury gets most of the rest.
After everything has been taken care of, the Fed had a net income of $80.7 billion, which is tax free, of which it remits an estimated $80.2 billion to the Treasury:
In the chart, note how the surging interest payments to the banks slashed into the remittances to the Treasury. If the Fed hadn’t decided to pay interest on excess reserves, to benefit the banks, it could remit this money to the Treasury. In other words, every dime the banks receive comes indirectly out of the pocket of taxpayers.
The Fed will likely raise rates further this year. There is talk of four rate hikes. This would push the rate on excess reserves to 2.5% by the end of the year. Excess reserves will likely shrink as QE is being unwound, but not fast enough. And the amount that the Fed pays the banks this year might surge to $40 billion or more — a glorious and hidden subsidy extracted from taxpayer pockets.
At the same time, the Fed is shedding its income-producing assets as it unwinds QE and will make less income in 2018 than in 2017. With less money coming in, and paying more to the banks, the amounts remitted to Treasury and therefore the taxpayer will likely plunge. But at least megabank CEOs will be happy. Ka-ching.
First decline in the Bank of Japan’s colossal balance sheet since 2012! Read… QE Party Over, even by the Bank of Japan
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.