Federal Reserve Makes $88.9 Billion in Profit

Yesterday, the Federal Reserve announced in a preliminary estimate that it had made a profit in 2012 and transferred $88.9 billion to the Treasury. This is a new high for the Fed, up from the previous high of $79 billion in 2010, and $77 billion last year.

The Fed took in $91.0 billion, the overwhelming majority ($80.5 billion) of which was attained through its open-market operations. The Fed was selling short-term T-bill and buying longer-term bonds as part of what has been called "Operation Twist," and recently has been buying more mortgage-backed securities as part of QE3. Expenses of the Federal Reserve System totaled $4.9 billion, with an additional $387 million to fund the operations of the Bureau of Consumer Financial Protection and Office of Financial Research that were created by the Dodd-Frank Act.

Revenue from the Federal Reserve has been one of the more significant revenue streams flowing to the federal government in the past few years. It has raised about as much money as all excise taxes and ranks only behind individual income, corporate income, and payoll taxes. It's worth noting, though, that while Federal Reserve remittances have dramatically increased over the last few years, that is unlikely to continue when the economy recovers and interest rates begin to rise. The Fed will likely increase their holdings of short-term T-bills, but they will significantly shrink their balance sheet overall to unwind from their current accommodative monetary position.

Unfortunately, since the Fed has been sending Treasury these profits routinely throughout the year, this will not affect the headroom Treasury has under the debt ceiling.

Of course, the Federal Reserve does not conduct its operations with the intention of earning the greatest profit -- it is simply a side consequence of their balance sheet expansion since the financial crisis began. But it reminds us that beyond just the economic effect, the Fed's QE efforts have a budgetary effect as well.