Mulling Over the Fed's 34 Basis Points

by: David Merkel, CFA

Who cares what the Federal Reserve remits to the U.S. Treasury? Some are amazed by the record $78.4 billion remitted to the Treasury, as if that were “found money.” It is all stolen out of the pockets of savers, who deserve a currency that is truly a store of value, and rewards saving.

The amazing thing to me is that the Fed only earns 34 basis points on assets, especially since it pays less than 25 basis points on assets as a cost of funds over the last year. The huge earnings points me to the massive leverage the Fed uses, 44x, which it would/should not let the banks that it regulates operate at.

But the Fed is different, because it can create money/credit out of thin air. It can’t go broke as a result. But, in the limit, that doesn’t mean that really ugly things could not happen if the Fed were to create money with abandon in order to make its books balance after massive capital losses.

So I don’t give the Fed any credit for remitting a record amount to the U.S. Treasury. The day may come when the Treasury may have to recapitalize the Fed after credit losses, or the day may come when inflation causes people to distrust the value of the U.S. dollar.

My big surprise is that the Fed isn’t earning more in this environment. QE 1 and 2 should be rich sources of earnings, but is it not happening because the Fed keeps its maturities short? If so, good, and it explains why QE is so weak. QE is meant to stimulate through lowering longer interest rates, and that has not happened to the degree that it might ... which means the Fed is playing it safe.

Humph. So we have a Fed that muddles in the middle. Probably the best that we could hope for? Perhaps. I need to think about this more, and perhaps this mutes my criticism of the Fed. That’s not what I intended when I started writing, but it is where I am now.

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