Remittances from the Fed to the Treasury have gone from billions to almost zero

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

We all know the difficulties the Federal Reserve has today in holding the US and world financial systems together in the wake of the collapse of the Silicon Valley Bank.

But let me tell you about another problem the Fed has that has nothing to do with the global financial system, but is serious nonetheless.

The problem, which few people know about, is that the Fed’s own revenue stream has evaporated from the rate hikes it has imposed over the past year to curb inflation.

A wonderful example of irony: those rate hikes have resulted in billions of dollars in operating losses for the Fed.

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No, I’m not talking about the decline in the market value of the bonds and other assets the Fed owns. I’m talking about the Fed having to send out more money than it’s coming in.

Those operating losses mean the U.S. Treasury will fall short on the billions of dollars in Fed profits it’s been getting for years. And it also means that, by extension, American taxpayers will also fall short.

Let me tell you why.

Under Federal Reserve rules, all 12 regional Fed banks send essentially all of their weekly profits to the Treasury, which mixes those Fed remittances, as they’re called, with the money flowing in from taxes and other sources.

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As you can see in the accompanying chart, the remittances from the Fed banks to the Treasury have amounted to tens of billions of dollars per year for the past 10 years. That money has reduced federal budget deficits, which in turn has reduced the amount the Treasury has had to borrow to pay its bills, and thus put some downward pressure on interest rates.

This year, however, banks only sent a relatively paltry $55 million to the Treasury in January and February — and it seems unlikely that they will be sending much (if anything) to the Treasury anytime soon.

How is that possible?

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

Those commitments are a result of the “quantitative easing” the Fed did as it pumped money into the financial system to offset the economic hardship caused by Covid.

Those $5 trillion in loans from the Fed, which keep that money from flooding the financial market and driving interest rates down, are yielding interest at short-term Treasury rates, which were barely above zero for most of last year, but is now between 4% and 5%. range.

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However, because the Fed has downsized its own securities portfolio to wind down quantitative easing, the 12 member banks are not adding many new, better-paying securities to the asset side of their balance sheets.

This means that banks’ interest accounts will almost certainly remain higher than their interest income. Under the rules governing such matters, a regional Fed bank that has incurred net losses must recoup those losses before it can return profits to the Treasury. That’s why the $55 million in remittances this year, puny if the amount is relative to what the banks sent in previous years, was quite surprising.

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

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

Now, however, the Fed banks are collectively more under water than they were at the beginning of this year. No one had transferred anything to the Treasury this month, last I checked, and it’s not clear when – or if – some of them will make enough profit to cover their accumulated losses and return money to the Treasury this year. going to transfer.

According to Church, the total cumulative losses of the 12 banks were $38.2 billion as of March 1 and were rising by about $3 billion per week.

Since I don’t have numbers for every regional Fed, I suppose it’s possible that some of them may have relatively modestly accrued deficits and be able to recoup those losses and send the Treasury a few dollars this year.

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

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

I’m sure this situation will reverse itself at some point, because nothing in finance is forever. And the Fed, for reasons we can discuss another time, has endless financial staying power.

This means that the regional Feds will one day earn enough to recoup their losses and send substantial amounts back to the Treasury.

But I certainly wouldn’t hold my breath waiting for that to happen.


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