By contrast, the second side effect of the Fed’s low-rate policies — helping finance our federal budget deficit — is an unalloyed good thing.
The Fed has been making huge profits since its stimulus programs kicked into high gear four years ago, and it has contributed virtually all of them to the Treasury. Last year, the Fed says, it made about $91 billion in profits and sent $88.9 billion of that to the Treasury. That’s up from $31.7 billion it sent in 2008, the last almost-normal year, and $47.4 billion, $79.3 billion, and $75.4 billion from 2009 through 2011, respectively.
The Fed’s profit is soaring because the size of its securities portfolio has risen, to about $2.65 trillion at the end of last year from about $750 billion at year-end 2007. The Fed has been buying Treasury and mortgage-backed securities by the boatload to raise their prices, which has the effect of driving down interest rates.
The Fed bought these securities with money that it essentially created out of thin air and then credited to the Fed accounts of the financial institutions that sold the securities. The Fed pays nominal interest on the money that sellers leave in those accounts, and no interest on the money withdrawn from them for other purposes, such as making loans. Meanwhile, the Fed collects interest on the securities it has bought. Thus, expanding the portfolio has been hugely profitable.
“The Fed isn’t running these programs to maximize its own profit; that’s just a side effect,” says Ray Stone of Stone McCarthy Research Associates of Princeton, N.J., a leading Fed maven. He predicts the Fed will post higher profits — and send more money to the Treasury — this year than it did last year.
On top of that, the Fed’s projected purchases of about $540 billion of Treasury securities this year will indirectly fund about half of this year’s federal budget deficit. Nice work if you can get it. And keep it.
There’s one crucial difference between Rogaine and Fed rate-cutting: staying power. You can take Rogaine indefinitely, but the Fed’s keep-lowering-rates program doesn’t have an indefinite shelf life. Bernanke has driven U.S. interest rates to their lowest level in modern times, but he can’t drive them below zero. Even if the Fed is reluctant to tighten, it doesn’t control the world — and it can’t indefinitely withstand pressure from financial markets and from other central banks. When the Fed’s inevitable dial-back kicks in, the dollar will rise, and Fed profits and remittances to the Treasury will fall. The bottom line: Pharmaceutical stimulus is forever. But Fed stimulus isn’t.
Sloan is Fortune magazine’s senior editor at large. Doris Burke contributed.