The Fed’s remittances to the Treasury have gone from billions to almost zero

This is a comment by Allan Sloan, an independent business journalist and seven-time winner of the Loeb Award, business journalism’s highest honor.

We all know about the problems the Federal Reserve is having these days trying to hold the US and world financial systems together in the wake of the Silicon Valley Bank collapse.

But let me tell you about another problem the Fed has that doesn’t involve the world’s financial system—but is still serious.

The problem, which few people know about, is that the Fed’s own income stream has been evaporated by the rate hikes it has imposed over the past year to try to tame inflation.

In a wonderful example of irony, these rate hikes have caused the Fed to suffer billions of dollars in operating losses.

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No, I’m not talking about the decline in the market value of the bonds and other assets that the Fed owns. I’m talking about the Fed sending more money out the door than coming in.

These operating losses mean that the US Treasury will be shorted of the billions of dollars in Fed profits it had enjoyed for years. And it also means that American taxpayers, by extension, also fall short.

Let me tell you why.

Under Federal Reserve rules, all 12 regional Fed banks send virtually all of their weekly profits to the Treasury Department, mixing these Fed transfers, as they are known, with the money flowing in from taxes and other sources.

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As you can see from the accompanying chart, the transfers to the Treasury by the Fed banks have been in the tens of billions of dollars annually for each of the last 10 years. That money has reduced the federal budget deficit, which in turn has reduced the amount the Treasury has had to borrow to pay its bills, putting some downward pressure on interest rates.

This year, however, the banks only sent a relatively paltry $55 million to the Treasury in January and February — and it doesn’t look like they’ll be sending much (if anything) more to the Treasury in the near future.


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According to Stephen Church of Piscataqua Research, the person who brought this matter to my attention, it’s because interest rates have risen rapidly on the $5 trillion plus owed by the Fed to financial institutions and money market funds.

These commitments are the result of the “quantitative easing” that the Fed did when it pumped money into the financial system to offset the economic problems caused by Covid.

That $5 trillion of Fed borrowing, which keeps that money from flooding the financial market and driving down interest rates, carries interest at short-term Treasury yields, which were barely above zero for most of last year but are now between 4% and 5%. range.

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But because the Fed has shrunk its own securities portfolio to begin winding down quantitative easing, its 12 member banks are not adding much in the way of new, higher-paying securities to the asset side of their balance sheets.

This means that banks’ interest bills will almost certainly remain higher than their interest income will. Under the rules governing such things, a regional Fed bank that has incurred net losses must recoup those losses before it can begin transferring profits back to the Treasury. That’s why the $55 million in remittances this year, as small as the amount is compared to what the banks sent in previous years, was kind of surprising.

In a January press release, the Fed said that as of last September, most of its 12 regional banks had stopped sending weekly money to the Treasury and that the banks had incurred combined losses (which the Fed called “a deferred asset”) on a total of 18.8 billion dollars at the end of the year.

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However, some of the regional banks were still able to send money to the treasury this year – hence the $55 million that the treasury got in January and February.

But now, overall, the Fed banks are deeper underwater than they were at the beginning of this year. No one had paid anything into the Treasury this month when I last checked, and it’s not clear when — or if — some of them will earn enough to cover their accumulated losses and start paying money into the Treasury again this year.

According to Church, the total cumulative losses of the 12 banks amounted to US$38.2 billion per March 1 and rose at a rate of about $3 billion per week.

Since I don’t have numbers for each regional Fed, I suspect it’s possible that some of them have relatively modest accumulated deficits and may be able to recoup those losses and send the Treasury a few bucks this year.

But barring some kind of divine financial intervention, I can’t imagine the Fed banks sending the Treasury anything comparable to the billions of dollars they’ve sent in previous years.

I asked the Fed and Treasury to discuss this with me, but they both declined to do so.

At some point I’m sure this situation will reverse itself because nothing in the financial world is forever. And the Fed, for reasons we can discuss another time, has infinite financial stamina.

This means that one day the regional Feds will earn enough to recoup their losses and start sending significant amounts to the Treasury again.

But I certainly wasn’t going to hold my breath and wait for that to happen.


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