Fed’s Bond Buying Yields Bonanza for Treasury

Central Bank Delivers Record $98.7 Billion in Profits


The Federal Reserve earned $115.9 billion in interest income from its bondholdings in 2014. Here, Fed Chairwoman Janet Yellen after last month’s policy meeting. GETTY IMAGES

By MICHAEL S. DERBY

Jan. 9, 2015 2:06 p.m. ET

The Federal Reserve sent a record $98.7 billion in profits to the Treasury Department in 2014, largely reflecting higher interest earnings on its big bond holdings.

The central bank’s portfolio of securities, property and other assets has expanded to more than $4.5 trillion since the financial crisis from less than $1 trillion before, driven primarily by three rounds of bond purchases aimed at stabilizing the financial system and spurring stronger economic growth.

The Fed earns interest on the bonds as well as income from other sources. Under law, it uses its revenue to cover operating expenses and sends much of the rest to the Treasury’s general fund, where the money is used to pay government bills.

The central bank’s remittance to the Treasury last year was the biggest since 2012, when it handed over $88.4 billion. Before the crisis, the Fed turned over $21.5 billion in 2005, and $34.6 billion in 2006. The figures released Friday are preliminary and subject to revision.

The Fed said it earned $115.9 billion in interest income from bonds in 2014. The central bank in October ended its third round of bond buying, which was aimed at lowering long-term interest rates to encourage household and business borrowing.

The cost of the Fed’s 12 regional bank operations was $3.6 billion last year. Costs related to the central bank’s Consumer Financial Protection Bureau totaled $563 million.

The Fed also spent $6.9 billion last year to operate facilities that pay interest on the money banks park at the central bank, called reserves, and on term deposits it accepts from financial firms.

Although the central bank is likely to remain a strong contributor to the Treasury for a while, Fed profits will likely shrink as it raises short-term interest rates. That will require the Fed to pay higher interest rates on reserves and term deposits. And further down the road, Fed officials envision allowing the portfolio to shrink gradually as the bonds mature, which will reduce interest income.

Some officials worry this process could push Fed earnings into the red. While it wouldn’t present an operational problem for the central bank, it could draw political fire from lawmakers unhappy with a government institution losing money to make payments to big banks, many of them foreign.

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