The Federal Reserve turned a profit of $77.4 billion last year, driven by a dramatic increase in its balance sheet due to its policy of buying up securities to help stimulate economic growth. The central bank’s profits came from interest on the $2.9 trillion worth of assets now on its books, much of it Treasuries and mortgage-backed securities purchased during the financial crisis and its aftermath.
After covering its expenses for 2011, the Fed sent $75.4 billion to the U.S. Treasury.
Prior to the eruption of the financial crisis in September 2008, the Fed maintained a balance sheet of about $800 billion — primarily consisting of Treasury securities — and had never turned a profit greater than $40 billion. But once the crisis hit, the Fed began buying up massive amounts of Treasuries, mortgage-backed securities and other assets, under the direction of Fed Chairman Ben Bernanke.
The goal of this purchasing spree, in which newly-created money was injected into the financial system — a policy known as quantitative easing — was to increase bank reserves and lower interest rates, making it easier for banks to lend and businesses to borrow. By the end of 2009, the Fed had purchased over $1 trillion worth of Treasury and mortgage-backed securities, bringing its total balance sheet to over $2 trillion.
As the economic recovery stalled in the middle of 2010, the Fed announced a second round of quantitative easing (QE2) that involved buying over $600 billion worth of Treasuries by the middle of 2011. This additional round caused the Fed’s balance sheet to hit $2.9 billion by the end of last year. The sheer scale of the Fed’s assets, then, is what’s driving the $75 billion-plus profits that the central bank has booked over the last two years.
With such a colossal balance sheet comprised primarily of debt, the Fed’s risk increases and its assets could theoretically lose value. On the other hand, the Federal Reserve is not a typical bank, as JPMorgan Chase chief US economist Michael Feroli observed Tuesday: “The Fed has no demandable liability that could force its insolvency.” That’s a polite way of saying that we probably shouldn’t worry about the Fed going bankrupt anytime soon.
A more realistic concern is that all of the Fed’s recent money-printing could cause inflation, driving up prices for food, energy, and consumer staples. But such a scenario hasn’t occurred. (And in fact, some argue that a bout of healthy inflation would actually benefit the economy.) In any event, inflation is currently under control, not least of all because U.S. economic growth remains modest, and — like high unemployment — is likely to remain so for the foreseeable future. The fact that the Fed could inject so much money into the economy without massive inflation shows how bad the crisis was, and how much intervention was needed just to get the economy back to some semblance of growth.
It’s possible that we will ultimately have to “pay the piper” for the Fed’s emergency money-printing campaigns of the last few years. But for now at least, with economic growth showing modest but encouraging signs, and inflation low, such a day of reckoning does not appear imminent.