Analyst Dick Bove says the Fed's balance sheet management is costing taxpayers money


The Federal Reserve is a government agency that has been entrusted by Congress with two important functions. It sets monetary policy for the nation and it regulates the nation’s banks. What is not as clearly understood is that the Federal Reserve is, itself, a bank. It takes in deposits and borrows money. Then, it uses this money to make loans and buy financial securities. Consequently, the Federal Reserve has a balance sheet and an income statement. Each year it produces an annual report on its performance just like any traditional bank would.

In 2014, the year before it started to increase interest rates, the Federal Reserve reported that it paid $7.0 billion in interest on the deposits and loans that it had. In that same year, it also reported that it took in $116 billion in interest income derived from the loan and securities that it had invested in.

In 2018, it is my estimate, the Federal Reserve paid out $42.8 billion in interest on its deposits and borrowings. At the same time, it is my estimate that it took in $113 billion in interest on the securities and loans that it holds.

Let me restate this. From 2014 to estimated 2018, the cost of the money the Fed had acquired jumped by an estimated 511 percent. The yield on the investments that the Fed made had declined by an estimated 2.6 percent.

The net result is that in 2014, the Federal Reserve reported a profit of $101.3 billion. In 2018, it is my estimate that the Fed’s profit was $63.2 billion; a decline of 37.6 percent. Since the Fed pays virtually all of its profits to the U.S. Treasury, its 2014 payment of $96.9 billion likely declined to an estimated $65 billion in 2018; a decline of 32.9 percent. The taxpayer loses approximately $32 billion because the Fed has seen its interest payments increase and its expected interest income decrease.

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