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.
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.
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!
Try it risk free for 90 days. And if you use the contact form below to tell me that you subscribed because you wanted to follow the money and find the profits, I’ll give you 15% off your subscription price, including all renewals. I’ll match your name and email address to your order and make the adjustment to your payments immediately.
Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.