January 10, 2011
Fed Pays a Record $78.4 Billion to Treasury
By SEWELL CHAN
WASHINGTON — Central banking in the aftermath of a financial crisis is a lucrative business, it turns out.
The Federal Reserve will deliver a record $78.4 billion to the Treasury from its investments last year, a 65 percent increase over the $47.4 billion it transferred in 2009, according to preliminary estimates released Monday.
The payment to the federal government’s coffers is a consequence of the Fed’s ballooning balance sheet, which stands at nearly $2.5 trillion — nearly triple what it was at the end of 2007, when turmoil from the bursting of the housing bubble began to roil financial markets.
Last March, the Fed completed the purchases of $1.25 trillion in mortgage-backed securities, and in November, it began buying $600 billion in Treasury bonds, all part of an effort to hold down long-term interest rates by purchasing securities.
Interest income from that huge investment portfolio has fueled record profits for the Fed for two consecutive years. But over time, when economic conditions return to normal, the portfolio could become a troublesome burden for the central bank, as the investments could lose value when interest rates rise.
“From the taxpayers’ view, I think it is a mistake to make much of this number either way,” said John H. Cochrane, an academic economist who has been critical of the Fed’s recent actions. “The Fed is acting like a huge hedge fund on our behalf. It is borrowing at very low short-term rates and investing in long-term government bonds, mortgages, and other risky loans. It made a profit on those investments last year, but it is bearing a lot of risk.”