JANUARY 10, 2012, 12:10 P.M. ET.

Fed Reports Profit, Sends Nearly $77 Billion to Treasury .

By LUCA DI LEO

The Federal Reserve turned $76.9 billion over to the U.S. Treasury last year, close to the record amount transferred to the government's coffers in 2010, amid a strong profit generated from its expanding portfolio of securities.

Preliminary unaudited results released by the central bank Tuesday showed the Fed had net income of $78.9 billion in 2011 mainly thanks to higher earnings on securities it bought to counter the recession and promote recovery.

In 2010, the Fed booked $81.7 billion in profits, contributing a record $79.3 billion to help finance government spending. Though it is earning more and turning more over to the Treasury, the Fed is also taking on more risk. Its portfolio of securities, loans and other assets has surged to almost $3.0 trillion since the crisis started.

During the financial crisis, the Fed bought securities whose value had collapsed amid fear and uncertainty in markets and it set up emergency lending programs for banks and firms, boosting the size of its balance sheet. The central bank came under attack for taking too many risks with taxpayers' money and putting itself in a position to suffer losses.

So far, however, the Fed's crisis-lending programs have produced profits. The increase in 2011 income was primarily a result of $83.6 billion in interest earnings from holdings of U.S. Treasurys, federal agency debt and securities held by government-run mortgage finance firms Fannie Mae and Freddie Mac, the Fed said.

The decline in profits from 2010 to 2011 was in part because its most profitable portfolios were smaller. For example, insurer American International Group Inc. repaid all of its obligations to the New York Fed, meaning the Fed's interest income from AIG portfolios got smaller.

The Fed could still lose money on its holdings. For example, if inflation rises to the point where the central bank needs to increase interest rates, the interest it pays banks on their reserves could rise at a cost to the Fed, or it could be forced to sell long-term government bonds at a loss.

But, for now, there are little signs of such a risk materializing. Inflation is slowing after a surge seen at the start of 2011. And because unemployment remains high, the Fed has said it's likely to keep short-term rates near zero until mid-2013 at least. Later this month, the central bank will publish rate forecasts that could show rates staying at a record low until 2014 or beyond.

The Fed official said the central bank doesn't have a measure of risk for its portfolio like a private bank would because the central bank is a public institution. He said the Fed's balance sheet -- now close to $3.0 trillion in size -- is a reflection of its monetary policy operations and should not be viewed as a way in which the Fed makes money.

After the Fed slashed short-term rates close to zero at the end of 2008, it began buying mortgage and government bonds to also push down long-term borrowing rates to spur spending and investment.

Write to Luca Di Leo at luca.dileo@dowjones.com

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