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The Fed’s money transfers to the Treasury have gone from billions to almost zero




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

We all know about the problems the Federal Reserve is having these days trying to hold the US and world financial systems together in the wake of the Silicon Valley Bank collapse.

But let me tell you about another problem the Fed has that doesn’t involve the world’s financial system—but is still serious.

The problem, as few people know, is that the Fed’s own revenue stream has been vaporized by the rate hikes it has imposed over the past year to try to curb inflation.

In a wonderful example of irony, these rate hikes have caused the Fed to suffer billions of dollars in operating losses.

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

These operating losses mean the US Treasury is going to be shorted billions of dollars in Fed profits that it had been getting for years. And that also means that American taxpayers will, by extension, also be shortchanged.

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 these Fed transfers, as they’re known, with money flowing in from taxes and other sources.

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As you can see from the accompanying chart, the Fed banks’ transfers to the Treasury have been in the tens of billions of dollars annually for each of the last 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, thus putting some downward pressure on interest rates.

This year, however, the banks only sent a relatively paltry $55 million to the Treasury in January and February – and it doesn’t look like they’ll be sending much (if anything) more to the Treasury any time soon.

Why?

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According to Stephen Church of Piscataqua Research, the person who brought this matter to my attention, it is because interest rates have risen rapidly on the $5 trillion plus that the Fed owes financial institutions and MMFs.

These commitments are the result of the “quantitative easing” the Fed did when it pumped money into the financial system to offset the economic problems caused by Covid.

That $5 trillion of Fed borrowing, which keeps the money from flooding the financial market and driving down interest rates, carries interest at short-term Treasury yields, which were barely above zero for much of last year but now stand at 4-5%. area.

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But because the Fed has shrunk its own securities portfolio to begin winding down quantitative easing, the 12 member banks aren’t adding much in the way of new, higher-paying securities to the asset side of the balance sheet.

This means that the banks’ interest bills will almost certainly remain higher than their interest income will. Under the rules that govern such things, a regional Fed bank that has suffered net losses must recoup those losses before it can begin transferring profits to the Treasury again. There are therefore 55 million dollars in money transfers this year, as small as the amount is compared to what the banks sent in previous years, it was somewhat surprising.

In a January press release, the Fed said that as of last September, most of the 12 regional banks had stopped sending weekly money to the Treasury, and that the banks had accumulated losses (which the Fed called “a non-performing asset”) totaling 18 .8 billion dollars at the turn of the year.

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

Now, however, the Fed banks are collectively deeper underwater than they were at the beginning of this year. None had transferred anything to the Treasury this month, last I checked, and it’s not clear when — or if — any of them will make enough profits to cover their accumulated losses and start transferring money to the Treasury again this year.

According to Church, the 12 banks’ combined cumulative losses totaled $38.2 billion as of March 1, increasing at a rate of about $3 billion a week.

Since I don’t have numbers for each regional Fed, I guess it’s possible that some of them have relatively modest accumulated deficits and may be able to recoup those losses and send the Treasury a few bucks this year.

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

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

At some point, I’m sure, this situation will reverse itself because nothing in the financial world is forever. And the Fed, for reasons we can discuss another time, has infinite financial endurance.

This means that one day the regional Feds will earn enough to recoup their losses and start sending significant sums to the Treasury again.

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

Email: editors@barrons.com



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