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mises.org / C.Jay Engel / March 24, 2017

As the Fed continues to increase the rate of interest it pays on excess reserves, the Fed’s profits that are left over are slowly going to shrink in size. Since the Fed sends its profits to the US Treasury each year, the US Treasury will be receiving less. The Wall Street Journal reported on Friday:

The Federal Reserve sent $91.5 billion in profits to the Treasury Department last year, a $6 billion decline that officials have long expected as a result of rising interest rates.

The Fed’s total net income declined by $7.6 billion, to $92.4 billion, according to the Fed’s audited financial statements released Friday. The decline was primarily the result of higher interest payments it made to banks on the reserves they keep at the central bank.

David Howden has explained this process — and the implications for “Fed independence” — rather nicely:

Each year, the Fed remits to the US Treasury its net income, and thus provides the federal government with an important source of funding.

For the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.

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