Normally, this would be ironic: The Fed doesn’t need to borrow; it creates money when it needs some. So it wouldn’t pay interest. But these are not normal times.
By Wolf Richter of WOLF STREET
The Fed reported its preliminary results this morning for the year 2018. The headline is that it sent $65.4 billion of its profits to the US Treasury Department in 2018, and that this amount had plunged by 18.5% from the remittances, as they’re called, in 2017, and by 44.1% from the peak of $117 billion in 2015.
The Fed earns interest income on the huge pile of securities it holds. After covering operating expenses, interest expenses, and some other items, it is required to remit the rest to the Treasury Department – to the taxpayer.
Therefore, the amounts in interest expense the Fed pays the banks on their “Excess Reserves” and “Required Reserves” comes out of the taxpayer’s pocket and its transferred to the banks to become bank profits, and thereby bank executive bonuses and stock holder dividends, funded by the dear taxpayers. And this amount was huge in 2018: $38.5 billion!
Here is what the Fed reported:
Interest income: $112.3 billion. This is the amount the Fed received in interest payments on the securities it holds, including those acquired as part of QE: Treasury securities, mortgage-backed securities (MBS), and government-sponsored enterprise (GSE) debt securities (the latter is now almost nothing in the grander scheme of things, just $2.4 billion, and down from $169 billion peak in 2010).
The chart below shows the Fed’s combined holdings of Treasury securities, MBS, and GSE debt securities. The QE unwind (which started in October 2017) whittled down the balance of those three types of securities by $392 billion.
“Interest expenses”: $38.5 billion and $4.3 billion.
Normally, these line items would be ironic because, obviously, the Fed doesn’t need to borrow money – it creates money when it needs some – and therefore, it wouldn’t need to pay interest. But these are not normal times…