The Cozy Relationship Between The Treasury And The Fed

Tyler Durden's picture

Submitted by David Howden via The Mises Institute,

Last year was a tough one for investors. Gold was down 10 percent. The Dow Industrials fell 2.5 percent, and most bond indexes finished down by at least that much.

One institution that performed remarkably well in 2015 was the Federal Reserve. It just finished its most profitable year on record. The $100 billion in net income earned last year was a slight improvement over the previous year. That total was also roughly three times higher than the Fed’s income from 2007, the last year before it initiated its Quantitative Easing programs in the wake of the financial crisis.

Since the Fed does not exist to generate profits, some may be confused as to how it could have such a great year at doing so.

Here’s how it works. Every time the Fed expands the money supply it buys an asset. Typically the asset is a financial security, like a US Treasury bond, and the counterparties are typically large banks. Figure 1 gives a simplified look at the Fed’s balance sheet at the end of 2015 and how it evolved over the year:

The Cozy Relationship between the Treasury and the Fed
Figure 1: Simplified Federal Reserve Balance Sheet (in millions of dollars)

Compared to previous years, 2015 was relatively uneventful at the Fed. Having completed the tapering of its Quantitative Easing programs in October 2014, the Fed’s asset holdings held constant over the year. This was in stark contrast to the previous six years, during which the Fed purchased $3.5 trillion of assets. The Fed earns interest on its assets but most of its liabilities are non-interest bearing, like the $1.4 trillion worth of Federal Reserve notes crumpled in people’s pockets or buried under our mattresses. The Fed does pay interest on Reserve Bank balances, but at the current rate of 0.5 percent, this figure was a drop in the bucket relative to its total income. (Almost all of the Fed’s assets earn interest, while it incurs an interest expense on less than half of its liabilities.

What Does the Fed Do With All That Income?

The question that arises is what the Fed does with its profits.

Each year, the Fed remits to the US Treasury its net income, and thus provides the federal government with an important source of funding. Figure 2 shows how this figure has evolved since 2001.

The Cozy Relationship between the Treasury and the Fed
Figure 2: Treasury Interest and Fed Remittances (in billions of dollars)

A decade ago, back when the Fed was a smaller size, Fed remittances were fairly steady, in the neighborhood of $20 billion a year. This all changed after 2008 as the Fed’s Quantitative Easing programs increased the amount of interest-earning assets that would generate funds to transfer back to the Treasury. This year’s figure of $97.7 billion is more than four times the amount transferred just ten years ago, an annual growth rate of more than 16 percent. (At least something is growing quickly in this economy.)

Big Bucks for the US Treasury

For the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.

The federal government paid out $223 billion in interest payments last year. The Fed remitted almost $100 billion back, leaving the net interest expense at around $125 billion. It’s not just historically low interest rates that are making it easier for the Treasury to borrow in a way that, if it were done by anyone else, would classify them as subprime. The Fed is also chipping in and helping out where it can.

Also shown in figure 2 is the percentage of the federal interest expense that is remitted back by the Fed. For 2015, this figure neared 45 percent. That figure is a good way to think about the free lunch that the Fed gives to the Treasury.

In more “normal” times (i.e., prior to 2008) around 10 to 15 percent of the Treasury’s interest payments were paid back to it by the Fed. This figure has grown to almost four times that amount over the past seven years and it doesn’t look likr this trend will abate anytime soon.

Implications for Fed “Independence”

As much as economists talk about the independence that the Fed holds from Congress, these remittances represent a strong link. In fact, since they enable federal spending they create a form of quasi-fiscal policy for the Fed to use, in addition to its more common monetary policy options.

Consider that since Treasury debt is almost never repaid in net terms (old issues are retired but replaced with new debt issuances), the true cost of financing the US government’s borrowing is not the gross amount of debt outstanding but the annual interest expense it faces. Viewed this way, nearly half of the Treasury’s borrowing was financed by the Fed last year. Absent these Fed remittances, Congress would need to look at either an alternative funding source (though I am not sure how many takers there are for the Fed’s $2.5 trillion Treasury holdings) or make some serious cuts.

How serious? NASA’s operating budget was roughly $18 billion last year, so a lack of Fed remittances would cause the Treasury to cut around five NASA-sized programs. Alternatively, the governments Supplemental Nutrition Assistance Program (previously known as “food stamps”) cost $70 billion in 2014. Without the Fed’s remittances, Congress would have to stop paying out all food stamp recipients plus it would be forced to defund almost two NASAs.

More important in many Americans’ hearts is their monthly social security check. In 2014, $830 billion of social security checks were mailed out. Without Fed remittances, retirees might see their monthly check cut by about 12 percent.

For those concerned with the burgeoning size of the federal government, putting a stop to Fed remittances would put a serious dent in public finances and force some serious thought as to what programs need to be cut.

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Soul Glow's picture

If you haven't read this then your homework for Project Mayhem is to....

Executive Order 12631--Working Group on Financial Markets -

Minions's picture
Minions (not verified) Soul Glow Feb 4, 2016 9:27 PM

The cozy ownership of the Fed & their sycophants at the Treasury <<>>

cheka's picture

cut ss??? f that.  dc has a 100 trillion plus of assets on balance sheet.  ss funds were used to acquire/maintain some of these.  sell some of it and put the money back.  problem solved.  no liars in dc telling us we need to raise age or worse, MEANS TESTING

every repug prez candidate minus trump is trying to convince us that we HAVE TO cut ss.  total lie.

All Risk No Reward's picture

The Mises and libertarian crowd really need to up their game.  The Rockefeller funding has seemed to have blurred their vision a bit.

The Debt-Money Monopolists run the show.  PERIOD.  They define and produce money in authoritarian fashion (try voting on money... not gonna happen) and they issue it out to willing people who will do most anything for some of their debt-money.

The governments are a Debt-Money Monopolist vassal front.  The politicians are financed by the DMM and the media that promotes them is financed by the DMM.  The DMM isn't going to finance their undoing, that's how you know that Trump won't be their undoing.

The mega-banks are the corporate fronts of the Debt-Money Monopolists and these corporate fronts control the Federal Reserve.

Obsessing over same colored chess pieces under the mental delusion that they are at odds with each other and that no Debt-Money Monopolist chess master exists is an errand for fools.

But that Rockefeller money came with influence, didn't it?

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Feb 4, 2016 9:17 PM

Well of course the money printing jews don't pay interest!


Rabbi Yitzhak Ginsburg declared, "We have to recognize that Jewish blood and the blood of a goy are not the same thing." (NY Times, June 6, 1989, p.5).

Soul Glow's picture

WASPs run Wall Street.  Jews are a minority, albeit an important one.  And none of them are really religious.  They serve a different god.  Some call him Lucifer, some Molek, others worship no god and say nothing matters in this life because there is no heaven, no hell, just now, so do as thou wilt.

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Soul Glow Feb 4, 2016 9:33 PM

So much logical fallacy, so much lying, whinging and complaining!

The sufferink!

Public Service Message to all Goys


Hellstorm:The TRUTH about the anglo-zionist rape and murder of Germany

Official holohoax conspiracy theory Debunked by (not hard really) olf German lady

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Soul Glow Feb 4, 2016 9:45 PM

The waltons are jewish.

The koch's are jewish.

The mars family has a plethora of female jewsians in it

But those are little fish.

Pikers compared to the ko$her rothchilds and rockefelers and the ko$her royal family.

Goina have to wake up earlier in tel aviv to prove me wrong, schlomo shinklestein!

All Risk No Reward's picture

Unless you are paid to spread disinformation, make a tyrant mad and think outside their false narratives.

How is it rational to lump a Jewish baker with David de Rothschild?

It doesn't, but that's the corruption that comes from blindly accepting a cover story that ultimately protects the real bad actors.

The #1 threat to humanity is not "the Jews..."  but THE DEBT-MONEY MONOPOLY.

Rockefeller is FAR MORE DANGEROUS than your Jewish neighbor.

British Royalty is FAR MORE DANGEROUS than your Jewish neighbor.

But the most dangerous thing is the deceptive programmd bias running in your mind.

Reject it.  Focus your attention, laserlike, on the real culprits.  99.9% of Jewish people are victims of the Debt-Money Monopolist.

The Jewish people in Hitler's slave camps where marked and tracked by the Debt-Money Monopolist IBM corporate front.

Wrap your mind around that fact and stop letting the Debt-Money Monopolists manipulate your tribalism to their benefit.

All Risk No Reward's picture

Two down votes, but no comment to reflect the lack of thought behind the down votes?

That's about right, but that's THE PROBLEM.

Think.  Communicate.  Discatrd the insecurity.  Embrace new ideas because that's how ordinary people advance their knowledge beyond the pre-programmed Debt-Money Monopolist financed and engineered "script."

iggenFlot's picture
iggenFlot (not verified) GhostOfDiogenes Feb 4, 2016 9:25 PM

I think I've discovered a racist on Zero Hedge....

Wait...another one!  And another!  Yikes!  These backward, anti-semites have me surrounded!

Minions's picture
Minions (not verified) iggenFlot Feb 4, 2016 9:29 PM

Antisemitism IS a trick!!!!! oh dear =>

Father Thyme's picture
Father Thyme (not verified) Minions Feb 4, 2016 9:35 PM

But how many of the people here at ZH complaining about Jews turn right around and worship a mystical Jewish "Rabbi?"

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Father Thyme Feb 4, 2016 9:39 PM

Hardly any.

The ko$her hippie/warrior zombie who gets eaten and drunk by morons who worship him will never attack the juden.

That is why xtians are WORSE than jews, and especially moozlims.

I seriously have never been treated like xtian and jewish women have treated me.

At least they still retain some dignity and femininity.

Judeo-christians women are all complete whores.

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Minions Feb 4, 2016 9:35 PM

Yup. Its a trick the filthy, lying, scheeming, gold bricking, land grabbing satan worshipping jews use.

.....yet they are somehow victims?

iggenFlot's picture
iggenFlot (not verified) Minions Feb 4, 2016 9:37 PM

I hear ya.  The Holocaust didn't happen, either!  Good times....

Soul Glow's picture

You'd throw the baby out with the bath water.

g&#039;kar's picture

there is the fed and then there are the private banks that own the fed. since the fed and the private banks that own the fed are never audited, all numbers about the fed and the private banks that own the fed are not to be trusted and most likely bogus

iggenFlot's picture
iggenFlot (not verified) Feb 4, 2016 9:23 PM

Tyler has promised an article in the next day or two entitled, "The Cozy Relationship Between Russia and Zero Hedge."  In it, Tyler lays bare how Zero Hedge is an obsequious mouthpiece for the Putin-centric worldview.

Look for it.

Soul Glow's picture

Zero Hedge has detailed that Russia is broke along with every other Nation-State.

DavidPierre's picture

When it comes to the fabled President's Working Group on Capital Markets, also known as the Plunge Protection Team, the myths about the subject are certainly far greater than any underlying reality.

flyonmywall's picture

The article was a nice, but incomplete analysis, with all due respect.

The author seemed to forget about the 6% dividend on shares held by banks. Every bank is required to buy a number of shares in their Federal District's Reserve bank. They then get a 6% dividend on these shares.

There was a recent piece of legislation which aimed to cut this dividend from 6% to 1.5% (as far as I recall). This measure was quietly killed. If this legislation had passed, the Fed would have had to return even more money back.

Fuck you, Fed.



GhostOfDiogenes's picture
GhostOfDiogenes (not verified) flyonmywall Feb 4, 2016 9:52 PM

The FED is a monopoly of banks who serve the jews.

It is the same apparatus that has killed presidents, kings, and millions of others.

Telling it off harms no one.

In fact, your vanilty simple makes it stronger...

I don't really expect much more from dumbfucking 'mericans of zerohedge to figure this out though.

Mediocritas's picture

Correct. Before remittance, the Fed uses profits to cover its operating expenses, which includes the 6% dividend. Of course they gold-plate the shit out of everything so US taxpayers end up funding their comfortable lives.

Not mentioned also is the fact that, BY LAW, the Fed is not allowed to buy TSYs directly from Treasury, even though that is the obvious purpose of OMO. BY LAW they MUST go through the Primary Dealers who, of course, extract their skim / commission.

Once more, free money given to the banks and mandated to be so by the law. 

It's total fucking bullshit. Member banks get a tax-free 6% dividend (the older ones do anyway), plus get to skim the flow every time the Fed's book is rolled, risk free.

And you get to pay for it.


In another article, Simon Black is rubbishing the proposal to give Post Offices basic banking powers. He's being a fucking asshole. It used to be this way, and it also used to be the case that Post Office Banks could sell US TSYs directly to the public without asshole Wall St middlemen skimming taxpayers' money.

There needs to be a national bank again, able to provide deposit services and easily sell TSYs direct to the public without any involvement whatsoever from Wall St. Banksters will, of course, do what they always do and sink any legislation that cuts their lunch.

flaunt's picture

So what you're saying is that the Fed isn't going anywhere anytime soon.

Omega_Man's picture

what about the money the fed makes for its shareholders... billions... and advantage it gives to its friends..


and why would US gold be held by the FED?? How can you write this article without addressing these points...


this is a HALF TRUTH article..

not to mention all the money it sends overseas to who knows where... but I am sure the beneficiaries are all TRIBE members. 

12357111317's picture

Gee.  The Fed is the only agency that claims to be a Federal agency which actually made money last year.  Maybe the Fed is not a Federal agency at all.

tarabel's picture



This is ridiculous.

The Fed pays all of its expenses and skims off 6% for dividend payments to its stockholders, and ONLY THEN returns the remaining money to the Treasury.

And it was the Treasury's money that got paid to the Fed in interest in the first fucking place. 

Magnanimously giving, say, 95% of the Treasury's money back to it every year represents a substantial cash cow to the government? Only a moron would believe that's a good deal.

Okay, maybe an imbecile as well. not to mention a proponent of NIRP. All right, you caught me on that one. They're the same thing.

Why don't we quintuple the amount of interest we pay to the Fed? Voila! Instant balanced budget.


cheka's picture

even better, that's six percent tax free

and the expenses include a fleet of lear jets, billion dollar art collectoin and curators...etc

Global Observer's picture

One point this article doesn't address is who the Fed should credit its profits to, if not the US Treasury? In 2014 the Fed had profits of close to US$ 100 billion after paying US$ 1.7 billion as stockholder dividend.

Should the profits be returned as dividend to stockholder banks, thus increasing their earnings from the Fed (by 58 times in 2014)? The only entity to which the Fed can justifiably remit its profits, it being an entity established by the Federal Law and in some sense "owned" by the citizens, is the US Treasury.

BubbaJones's picture

I'll just put this right here.  The individual who researched and brought this to light has never been heard from again.