WASHINGTON — Central banking in the aftermath of a financial crisis is a lucrative business, it turns out.
The Federal Reserve will deliver a record $78.4 billion to the Treasury from its investments last year, a 65 percent increase from the $47.4 billion it transferred in 2009, according to preliminary estimates released Monday.
“It’s interest that the Treasury didn’t have to pay to the Chinese,” the Fed’s chairman, Ben S. Bernanke, said, half-jokingly, dur
ing a Congressional hearing on Friday at which he offered a rough preview of the figures.
The transfer to the federal coffers is a byproduct of the ballooning Fed balance sheet, which now stands at nearly $2.5 trillion — nearly triple what it was at the end of 2007, when turmoil from the bursting of the housing bubble began to disrupt financial markets.
The Fed has been amassing assets in an effort to stimulate growth by holding down long-term interest rates. Short-term rates, which the Fed influences more directly, have been essentially zero for more than two years. Low long-term rates have made borrowing cheaper for corporations and households and have lifted securities markets, though unemployment remains stubbornly high.
Last March, the Fed completed the purchase of $1.25 trillion in mortgage-backed securities, and in November, it began buying $600 billion in Treasury bonds.
Interest income from its investment portfolio has produced record profits for the Fed for two consecutive years. But over time, when economic conditions improve, the portfolio could become a risk, because the investments could lose value when interest rates eventually rise.
“From the taxpayers’ view, I think it is a mistake to make much of this number either way,” said John H. Cochrane, an economist who has been critical of the central bank. “The Fed is acting like a huge hedge fund on our behalf. It is borrowing at very low short-term rates and investing in long-term government bonds, mortgages and other risky loans. It made a profit on those investments last year, but it is bearing a lot of risk.”
Mr. Cochrane, a University of Chicago finance professor, said the Fed was intentionally bearing those risks to support housing and other markets.
“But inevitably, with a big portfolio of long-term bonds, mortgages and risky securities, the day will come when the Fed loses money on those investments, at least on a mark-to-market basis,” Mr. Cochrane added, referring to the accounting the Fed uses to fairly value its balance sheet.
In testimony before the Senate Budget Committee on Friday, Mr. Bernanke acknowledged the risk. He gave an estimate of the Fed’s profit for 2010 and said that it was “much higher than normal.”
“Should it be the case that short-term interest rates rise, which of course could happen if the economy recovers and we need to normalize monetary policy, then those remittances could go down,” Mr. Bernanke said Friday.
For now, Mr. Bernanke added, the Fed “is a profitable program, from the perspective of the federal deficit.”
The new POMO schedule is released a 2 pm today. If it’s not enough money to make the market happy, well… just picture the fat kid in “Willy Wonka and the Chocolate Factory” without candy.
http://1.bp.blogspot.com/_sexjXt6LGDU/TS121932X-I/AAAAAAAABaM/S__b1XP8nF0/s1600/th.png
🙂
WASHINGTON — Central banking in the aftermath of a financial crisis is a lucrative business, it turns out.
The Federal Reserve will deliver a record $78.4 billion to the Treasury from its investments last year, a 65 percent increase from the $47.4 billion it transferred in 2009, according to preliminary estimates released Monday.
“It’s interest that the Treasury didn’t have to pay to the Chinese,” the Fed’s chairman, Ben S. Bernanke, said, half-jokingly, dur
ing a Congressional hearing on Friday at which he offered a rough preview of the figures.
The transfer to the federal coffers is a byproduct of the ballooning Fed balance sheet, which now stands at nearly $2.5 trillion — nearly triple what it was at the end of 2007, when turmoil from the bursting of the housing bubble began to disrupt financial markets.
The Fed has been amassing assets in an effort to stimulate growth by holding down long-term interest rates. Short-term rates, which the Fed influences more directly, have been essentially zero for more than two years. Low long-term rates have made borrowing cheaper for corporations and households and have lifted securities markets, though unemployment remains stubbornly high.
Last March, the Fed completed the purchase of $1.25 trillion in mortgage-backed securities, and in November, it began buying $600 billion in Treasury bonds.
Interest income from its investment portfolio has produced record profits for the Fed for two consecutive years. But over time, when economic conditions improve, the portfolio could become a risk, because the investments could lose value when interest rates eventually rise.
“From the taxpayers’ view, I think it is a mistake to make much of this number either way,” said John H. Cochrane, an economist who has been critical of the central bank. “The Fed is acting like a huge hedge fund on our behalf. It is borrowing at very low short-term rates and investing in long-term government bonds, mortgages and other risky loans. It made a profit on those investments last year, but it is bearing a lot of risk.”
Mr. Cochrane, a University of Chicago finance professor, said the Fed was intentionally bearing those risks to support housing and other markets.
“But inevitably, with a big portfolio of long-term bonds, mortgages and risky securities, the day will come when the Fed loses money on those investments, at least on a mark-to-market basis,” Mr. Cochrane added, referring to the accounting the Fed uses to fairly value its balance sheet.
In testimony before the Senate Budget Committee on Friday, Mr. Bernanke acknowledged the risk. He gave an estimate of the Fed’s profit for 2010 and said that it was “much higher than normal.”
“Should it be the case that short-term interest rates rise, which of course could happen if the economy recovers and we need to normalize monetary policy, then those remittances could go down,” Mr. Bernanke said Friday.
For now, Mr. Bernanke added, the Fed “is a profitable program, from the perspective of the federal deficit.”
Red,
Too funny….I have used the Willy Wonka and the Chocolate Factory analogy through the whole runup from the lows.
The new POMO schedule is released a 2 pm today. If it’s not enough money to make the market happy, well… just picture the fat kid in “Willy Wonka and the Chocolate Factory” without candy.
No, I think they will hit it today… probably before 2pm.
Red,
Do you think they wait to hit the FP tomorrow?
What happens at 2PM EST?
Ain’t that the truth! You are right, the call side is too heavy. I fully expect a sell off going into opx.
Market is sniffing too much pixie dust. OPEX will not let all those calls to get hit next week.
a follow up thought is that at some point, if there is no legit down testing. everybody looks around and says “HEY! we’ve become Zimbabwee!”