“Net income” is a bizarre term for an organization that buys trillions of dollars of securities with money that it itself created.
By Wolf Richter for WOLF STREET.
The Federal Reserve’s balance sheet is a gigantic pile of assets on one side and liabilities and statutory capital on the other side. That balance sheet, which is released weekly and which we discuss frequently, generates a lot of income and a lot of expenses. In addition, the Fed gets income from fees. It has a ton of operating expenses. It pays dividends to its shareholders. And it remits to the Treasury Department what’s left over. The Fed discloses all this annually in its financial statement.
On Friday afternoon, the Fed released its unaudited preliminary financial statement for 2021. The audited financial statements will be released later in 2022.
For what it’s worth: The Fed’s audit firm, KPMG, has been entangled in innumerable scandals – such as using stolen regulatory information to cheat on audit inspections – and massive audit failures, such as of UK outsourcing giant Carillion, which suddenly collapsed at the beginning of 2018. So there’s nothing to worry about.
The Fed’s total “net income” for 2021: $107.8 billion.
The Fed is a very profitable organization. For 2021, it reported “net income” of $107.8 billion. But the Fed’s term “net income” is somewhat bizarre for an organization that buys trillions of dollars of securities with money that it itself created. But OK, we’ll go with the flow.
The Fed doesn’t pay income taxes, but it remits nearly all of its “net income” to Treasury Department, as required under the Federal Reserve Act.
By comparison, Apple booked a pretax income of $109 billion in its fiscal year 2021, just ahead of the Fed’s $107.8 billion. Apple’s auditor is Ernst & Young, which is tangled up in its own long series of scandals and audit failures.
The Fed’s total Revenues: $123.1 billion, from:
- $122.4 billion in interest received on its holdings of securities, mostly Treasury securities and MBS that it purchased as part of its QE.
- $275 million in net income from its pandemic era emergency programs that are being unwound, such as the corporate bond and bond ETF holdings that it sold by November 2021.
- $457 million in fees from services, mostly paid by the banks.
The Fed’s total Expenses of $15.5 billion, from:
- $5.3 billion in interest on reserves, paid to the banks; the Fed pays 0.15% interest on cash that the banks put on deposit at the Fed.
- $1.9 billion in foreign currency revaluation losses
- $414 million in interest paid to counterparties of its reverse repos.
- $1 billion in costs related to producing, issuing, and retiring currency (the paper dollars).
- $5.3 billion in operating expenses of the 12 regional Federal Reserve Banks, including the salaries of the luminary traders that run these FRBs.
- $970 million in expenses of the Board of Governors (the federal agency, of which Powell is the chair)
- $628 million to fund the Consumer Financial Protection Bureau.
The Fed paid Dividends: $585 million.
The Fed paid $583 million (with an M) in statutory dividends to the shareholders of the 12 regional Federal Reserve Banks. The amount represents about 0.55% of its net income. These 12 FRBs include the New York Fed, the St. Louis Fed, the San Francisco Fed, the Dallas Fed, etc. Their shareholders are the largest financial firms in their districts.
The Fed paid the Treasury Department $107.4 billion.
Nearly all of the net income was “remitted,” as the Fed calls it, to the Treasury Department, as required under the Federal Reserve Act. The $107.4 billion for 2021 was the second-highest amount, behind the record in 2015.
That record in 2015 was composed of two elements: $97.7 billion from income and $19.3 billion from its “capital surplus.” The Fed had a statutory limit on its “capital surplus” of $10 billion, set by Congress in the Fixing America’s Surface Transportation Act of 2015.
In 2018, the remittance of $65.3 billion included $3.28 billion “capital surplus,” as required by Congress under the Bipartisan Budget Act of 2018 and under Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, to bring the capital surplus down to $6.825 billion.
For 2021, the $107.4 billion remittance included 40 million to reduce the capital surplus to $6.785 billion, as required by Congress under the National Defense Authorization Act for 2021.
This “capital surplus” is disclosed on the Fed’s weekly balance sheet. As of its current balance sheet, the Fed had $33.7 billion in “capital paid in” plus $6.785 billion in “surplus” capital, for a total capital of $40.5 billion.
The remittance of $107 billion to the Treasury Department means that the portion of the US debt that the Fed purchased (currently $5.68 trillion) is essentially interest free for the Treasury Department.
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