Fed Paid $29.3 Billion To Banks 'Not' To Lend In 2017; Gave $80 Billion To Treasury

Authored by Anthony Sanders via SnakeHoleLounge.com,

Yesterday, The New York Federal Reserve announced that it actually increased their $4.2 trillion balance sheet by $1 million rather than shrinking it.

This comes on the heels of The Federal Reserve announcing that it provided $80.2 billion in payments to the US Treasury in 2017. This is the lowest remittance to Treasury since 2015, but still positive.

The Fed’s $4.45-trillion of assets – including $2.45 trillion of US Treasury securities and $1.76 trillion of mortgage-backed securities that it acquired during years of QE – produce a boatload of interest income. How much interest income? $113.6 billion.

Which brings us to excess reserves. Excess reserves—cash funds held by banks over and above the Federal Reserve’s requirements—have grown dramatically since the financial crisis. Holding excess reserves is now much more attractive to banks because the cost of doing so is lower now that the Federal Reserve pays interest on those reserves.  Excess reserves as of the end of 2017 are around $2 trillion and the interest rate paid on excess reserves is now 1.50%.

In 2017, the interest that the Fed paid the US banks and foreign banks doing business in the US jumped by $13.8 billion to $25.9 billion. The Fed also paid banks $3.4 billion in interest on securities sold under agreement to repurchase. That brings the amount that the Fed paid to banks of $29.3 billion.

The Fed will likely raise rates further this year, perhaps 4 times.

This would push the rate on excess reserves to 2.5% by the end of the year. Excess reserves will likely shrink as QE is being unwound, but I am doubtful. And the amount that the Fed pays the banks this year might surge to $40 billion or more (slow shrinking and rising interest paid on Excess Reserves).

So, Treasury is receiving a windfall every year from The Fed courtesy of QE. And Treasury receives another windfall from the notorious 2012 profit sweep from Fannie Mae and Freddie Mac. (Can you spot Treasury’s changing of the Fannie/Freddie bailout terms??)

Yes, Treasury makes good money from The Federal Reserve and having seized the profits from Fannie Mae and Freddie Mac. Will they relinquish control?

Comments

Brazen Heist Jan 12, 2018 3:19 PM Permalink

Those excess reserves sitting on a big heap and earning interest while stawks go vertical are screaming what a disaster QE has been.

Why is the Fed keeping interest on excess reserves? Is it afraid of inflation or is it keeping them for insurance for collapse/bank runs?

Countrybunkererd Non-Corporate Entity Jan 12, 2018 3:23 PM Permalink

Actually I blame the "giver" because the giver wants to keep the flour parked (locked down in a vault) and not flowing out onto the streets (inflation).  The baker is doing what it is told and given a coupon for more flour for doing it so they are not exactly guiltless.  I guess we SHOULD blame CONgress for giving the FED the power in the first place and never taking it away.

In reply to by Non-Corporate Entity

spastic_colon Jan 12, 2018 3:21 PM Permalink

otherwise their 2% inflation "mandate" may have been hit!

 

" Excess reserves will likely shrink as QE is being unwound......" if inflation is supposedly still under 2% and another 25bps puts us into recession (see bond markets) what incentive do banks have to lend with an flat/inverted curve? reserve shrinkage lololol.

pitz Jan 12, 2018 3:34 PM Permalink

Oh good grief this nonsense again?  Banks lent to the Fed.  The Fed borrowed from the banks.  They have to pay interest.  The banks *were* lending.  That the economy is in such poor condition that the banks found lending to the Fed to be even a remotely reasonable proposition is certainly not the Fed's fault.  

Herdee Jan 12, 2018 3:34 PM Permalink

Ya, I'd hate to see the money run out for the bloated government. It'd create one hell of a hyperinflationary boom with unlimited printing done in a desperation atmosphere.

Herdee Jan 12, 2018 3:42 PM Permalink

As well, the Banks in New York were told recently that their reserves were still insufficient. Still, they are nowhere near being able to protect themselves from being "too big to fail", So what's out there is some fairly big elephant type risk.

WarPony Jan 12, 2018 3:52 PM Permalink

Well, at least the poor ole Fed booked their 6% profit ($6.816 Billion) off of the $113.6 billion interest income.  Thank goodness it's tax free.

libertyanyday Jan 13, 2018 5:27 PM Permalink

about 50 billion returned to the treasury.........interest earned on the 4.8 trillion in garbage mbs and short term treasuries..........how do they earn interest on treasuries ( int paid by taxpayer) and then repay it to the treasury............rob peter to pay paul and brag about it.??