The Federal Reserve System Keeps Little of the Money It Earns on Its Portfolio
May 18, 2011
From 1914 until 1942, the Federal Reserve System was allowed to keep as profits all money earned by its investment portfolio. It bought that portfolio by creating money out of nothing. This money was the basis of the profitability of the banks that held stock on the Federal Reserve System. It was a sweet deal.
It ended when two Populist Congressman, Wright Patman and Jerry Vorhis, got Congress to establish a new wartime rule. Henceforth, the FED would pay its operating expenses with interest income, but the remainder would be remitted to the Treasury. Roosevelt signed the bill into law. That ended the sweet deal.
So, it is not true any longer that the Federal Reserve System profits heavily from money created out of thin air. It operates. It pays nice salaries. It pays some return to banks that own it. But most of the money goes back to the Treasury.
How much money is remitted to the Treasury? These days, close to $80 billion a year. Here is the table for 2010, provided by the Federal Reserve Bank of San Francisco.
Here is a chart from the Peter G. Peterson Foundation. It surveys remittances from 2000 to 2015 (projected).
The Peterson Foundation article comments:
Of course, all of these actions come with a risk, and with a reasonable concern about the new role of the Federal Reserve. Instead of merely supervising financial markets, the Fed is now a key participant (the key participant, some would argue) in markets. Now that the Fed is so intertwined with the financial system, it may face "exit strategy" issues: if it pulls out of markets too quickly, it threatens to create deflation, leading to another decline in the economy; if, on the other hand, it pulls out too slowly, the economy is at risk of hyperinflation that would destroy the value of savings and place a hardship on Americans.
So, the FED's policies of late 2008 vastly expanded the FED's asset base, meaning the monetary base.
Still, you should not be misled by critics of the FED who complain the the FED and the banks are making huge profits off the FED's expansion of the monetary base.