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Federal Reserve Profits Cut 60% As Fed Uses Your Money to Subsidize Big Banks

Federal Reserve profits have plunged by 60% as the Fed increased the interest it pays to banks on excess reserves (IOER). That profit, technically a surplus, is paid to the US Treasury every month. That payment effectively reduces the Federal government’s budget deficit that must be covered by taxpayers.

In other words, Federal Reserve profits are returned to us! US taxpayers.

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But the Fed has gotten stingy with us as it gets more generous with its owner-banks. It’s like reverse Robin Hood, robbing the poor to give to the rich. It’s nothing new. The Fed did the same thing with QE and ZIRP.

Here’s How The Fed is Doing Reverse Robin Hood

Here’s how it works.

IOER is set at or near the Fed funds target rate. The Fed has been increasing IOER and the Fed Funds rate since late 2015. That means that taxpayers are effectively subsidizing the big banks while the Fed’s surplus that it returns to us dwindles away toward nothing.

I just reported in the Liquidity Trader update on Federal revenues and the Federal budget deficit, that Federal Reserve profits dropped by 62% year to year. Those payments totaled $7.66 billion in February 2016. That dropped to $2.89 billion in February this year. This means that over the past year, the Fed has increased its subsidy to the big banks at the annualized rate of $57 billion per year.

And that comes straight out of your pocket and mine. We are paying the banks increased profits out of our own pockets.

Talk about immoral Fed policy! It was bad enough that the Fed robbed our parents and grandparents of their life savings with ZIRP. Now it is robbing us so that banker pigs like Jamie Dimon can pad their bonuses. Meanwhile he cries crocodile tears that the poor are falling behind.

The US Treasury reports the Federal Reserve profits data every day in its Daily Treasury Statement. I’ve plotted it for you below. Ignore that spike in early 2016. Congress grabbed $10 billion in Fed retained surplus and transferred it to the Federal Highway Trust Fund. 

This Chart Tells The Sordid Federal Reserve Profits Story

Back in 2014 when QE ended and ZIRP (Zero Interest Rate Policy) was still in effect, the average Fed profits paid to the Treasury was over $2 billion per week.

Federal Reserve Earnings Returned to Taxpayers and Fed Funds

In 2016, the Fed was still earning nearly what it was in 2014. It was a little less because the Fed also runs a welfare program for unemployed economists. It hires them for do-nothing jobs writing propaganda telling the public what a great job the Fed is doing.

But I digress.

By early this year, Federal Reserve profits returned to taxpayers had dropped below $1 billion per week.

Maybe that’s why the Fed decided to stop raising the Fed Funds rate and IOER.

Money for Nothing, Interest for Free

The Fed also pays interests to nonbanks like money market funds with its Reverse Repo program. The rate on that is similar to IOER. Back when those rates were near zero, the Fed’s subsidy to the banks and money market funds was inconsequential. Now it’s apparently $1 billion per week.

And remember! This is interest on money that the banks got for free when the Fed was doing QE. The Fed bought securities from the Primary Dealers, virtually all owned by big banks, and paid for them with new money it printed out of thin air month after month. The banks’ balance sheets expanded week in and week out because they had a standing buyer for all the Treasury securities and MBS they could buy. They bought Treasuries and MBS, and the next week the Fed gave them more cash. Wash, rinse, repeat.

So they got free cash, and now the Fed pays them $52 billion a year in interest on that cash they got for free.

With your money!

Pretty disgusting.

You can read my latest analysis of monthly Federal revenues and the budget defecate at Liquidity Trader, or here at the Wall Street Examiner.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 

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