The Fed’s contribution to the government’s coffers still remains well above pre-crisis levels.
The Fed made an average annual contribution to the Treasury Department of $23 billion during the five years preceding the crisis. Since 2010, the average contribution has been $86 billion.
The Fed’s bond holdings comprise federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. By diving into the marketplace, the Fed created more competition, forcing investors to accept lower interest rates — and thus reducing the borrowing costs paid by businesses and consumers, as well as the federal government.
The interest that the Fed collects on its investments is paid by the federal government, and then returned to the government. But this wash cycle still saves money because those interest payments would otherwise be made to the outside investors who would have purchased the bonds.
“It’s interest that the Treasury didn’t have to pay to the Chinese,” Ben S. Bernanke, then the Fed’s chairman, told Congress back in 2011, when the annual windfalls were still new and surprising.
Since the 2008 crisis, the Fed’s earnings have saved the government more than $700 billion.
The Fed earns outsized profits on its investment holdings because it does not face financing costs. It buys bonds with money that it creates. But the Fed does have expenses, and they are rising.
The largest expense is a byproduct of the bond purchases. The Fed’s buying spree flooded the banking system with reserves — the Fed bought bonds from the banks, and paid them with reserves.
Before the crisis, the Fed raised rates by selling bonds to reduce the availability of reserves, which banks are required to hold in proportion to their holdings of customer deposits. But banks now hold plenty of excess reserves. Rather than reversing its bond purchases completely to drain those reserves, the Fed instead decided to raise rates by paying banks to leave reserves untouched.
Last year the Fed spent $25.9 billion on those interest payments, more than double the amount that it spent in 2016 — and the cost will continue to rise as the Fed continues to raise interest rates.
Some members of Congress have said the Fed is rewarding banks unnecessarily, and questions about the payments have become a staple feature of Congressional hearings with Fed leaders.
Janet L. Yellen, the Fed’s outgoing chairwoman, has defended the payments as the best way to end the Fed’s stimulus campaign — and the best way to manage interest rates going forward. Some experts also note that the payments are offset by costs that banks face to hold the reserves.
The numbers published Wednesday are preliminary. The final numbers are due later this year.