by Lee Adler, Wall Street Examiner
The Fed reported in January that it returned “profits” of $89 billion to US taxpayers in 2012 via its weekly remittances to the US Treasury. That was an average of $1.7 billion per week. As the Fed grew the SOMA beginning in late 2008, those remittances had grown from a pre-crisis level of an average of around $750 million per week to a peak average of around $1.7 billion when the Fed ended QE2. It had built the SOMA from under $500 billion during the crisis, when it had funded emergency alphabet soup programs by raiding the SOMA, to around $2.65 trillion in mid 2011. The income from the account remained near $1.7 billion per week while the size of the SOMA remained stable.
But the bottom dropped out in January, 6 weeks after the Fed began to settle its QE3 MBS purchases in mid November. Starting the week of January 11, the weekly average remittance to the Treasury dropped to $963 million, just a little more than half of the 2012 average.
What does it mean? While it may be fun to note that the Fed isn’t much of an investor and might even operate at a loss in the future when interest rates rise, for practical purposes, it’s meaningless. The Fed could operate at zero profit, or even at a loss, indefinitely by merely increasing its liability to the Treasury, or heaven forbid, marking to market some of the $460 billion in gold that it owns and carries on the books at a cost basis of $42 billion. The Fed will also probably never sell any of the paper that it holds, and since it doesn’t mark to market it will probably never in actuality show a “loss.” Its remittances to the Treasury, while shrinking to near zero, should continue.
The impact of holding all of its paper to maturity and possibly allowing some of it mature without rolling it over in an attempt to shrink the balance sheet back to a “normal” size is another matter, however. If they ever arrive at the point of actually shrinking the balance sheet by allowing the existing holdings to mature, it will impact the market because the Treasury would need to sell additional debt in the marketplace to replace the maturing debt held by the Fed.
We could come up with all kinds of crazy disastrous scenarios about what might happen. Rather than speculate on what the future holds in that regard however, I’d prefer to just watch the data and identify the forces of trend change as they happen. That’s doable. And it’s probably sufficient, because we should see the seeds of change soon enough to act ahead of the market. Markets have shown that they don’t discount the future, they follow the cash, in particular the cash pumped in by the Fed.
So we just need to follow the money. In spite of all the noise about the Fed potentially “losing money” in recent weeks, that will not constrain its ability to print money in the months ahead, and that’s the only thing that matters for now.
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