By Robin Harding in Washington
The US Federal Reserve sent $76.9bn in profits to the Treasury last year, according to preliminary results released yesterday, confirming its position as the most profitable bank in history.
At more than 3 per cent of federal government revenues, and about 0.5 per cent of US gross domestic product, the figure reveals how quantitative easing has had the side-effect of generating extraordinary earnings for the Fed.
But the scale of the Fed?s profits from its bloated balance sheet may also fuel attacks from critics who warn that it could suffer losses when it has to raise interest rates in the future.
As part of its efforts to support the economy, the Fed has bought billions of dollars in long-term Treasury
securities to drive down long-term interest rates.
The Fed earns interest of more than 1 per cent on many of those securities while it pays only 25 basis points to banks on their reserves. The difference allows it to record large profits which it remits to the Treasury.
If it has to raise interest rates quickly in the future, however, it would pay more on bank reserves while its securities income remained the same. If the rise in interest rates was fast enough, it could even have to suspend payments to the Treasury for a period.
Fed officials emphasise that its earnings are a byproduct of monetary policy and it does not consider profits when it decides on policy. The central bank
has veered between skimming over its earnings and drawing attention to them as a riposte to opponents who say it bails out banks.
The Fed?s 2011 remittance was slightly down on 2010?s record of $79.3bn but still far above the $20bn-$30bn that it generated in normal years before the financial crisis.
Fed officials said that the main reason for lower earnings this year was the repayment of loans by troubled insurer AIG as part of a financial restructuring in January 2011. There was also less demand for its liquidity facilities.
Income from loans was down by $3bn and income from variable interest entities, which includes assets from Bear Stearns, AIG and some other financial crisis programmes, was down by $8bn. On the other hand, interest income from its portfolio of Treasury securities was up by $9bn and the Fed earned a further $2bn from sales of short-term assets, which it is switching into longer-term Treasuries as part of the $400bn Operation Twist programme to extend the maturity of its balance sheet.
The Fed?s balance sheet grew by more than $500bn from the end of 2010 to the end of 2011 as it completed purchases under QE2, the programme of quantitative easing that it began in November 2010.
Also reducing 2011 profits were the $242m used to fund the controversial new Consumer Financial Protection Bureau and $40m to fund the Office of Financial Research, both created by the Dodd-Frank financial reform act.
? The Financial Times Limited 2012