Federal Reserve Payments to Treasury Decline With Balance Sheet Shrinking

Jon C. Ogg

The Federal Reserve announced on Thursday that it had sent payments of approximately $65.4 billion back to the U.S. Treasury from its estimated net income in 2018. The Federal Reserve estimated that its 2018 earnings were roughly $63.1 billion, primarily from interest earned on the securities held after purchases under its quantitative easing in prior years helped balloon the Fed’s balance sheet to more than $4.5 trillion at the post-recession peak. These remittances back to the U.S. Treasury were actually the lowest since 2009 and were down from the peaks of more than $90 billion in 2014 through 2016.

While these numbers sound rather large, the reality is that both key figures were lower than in 2017. Its earnings amounted to $80.7 billion in 2017. The Fed’s payments also included two lump-sum payments totaling $3.2 billion, which are necessary to reduce its total Reserve Bank capital surplus down to $6.825 billion under the 2018 Budget Act and under the Economic Growth Act. The actual 2018 audited Reserve Bank financial statements will not be available until March of 2019.

The drop in net income in 2018 from 2017 was said to be primarily attributable to an increase of $12.6 billion in interest expense associated with reserve balances held by depository institutions. Net income for 2018 came from $112.3 billion in interest income on securities acquired through its open market operations. The Federal Reserve Banks had interest expense of $38.5 billion, primarily associated with reserve balances held by depository institutions, and incurred interest expense of $4.6 billion on securities sold under agreement to repurchase.

Operating expenses of the Reserve Banks, net of Treasury reimbursements, totaled $4.3 billion in 2018. The Reserve Banks also were assessed $849 million for the costs related to producing, issuing and retiring currency, as well as $838 million for board expenditures and $337 million to fund the Consumer Financial Protection Bureau. There were additional earnings of $444 million from income from services, and statutory dividends totaled $1 billion in 2018.

While the Federal Reserve’s balance sheet trends have now dropped to about $4 trillion, that is down from the peak of $4.5 trillion held in Treasuries, government agency paper and mortgage-backed securities.