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> The federal reserve's remittances to the treasury are likely to be completely wiped out within the coming year. The reason is that the (low) interest it earns

> The federal reserve's remittances to the treasury are likely to be completely wiped out within the coming year. The reason is that the (low) interest it earns on its existing portfolio of government securities is fixed and will stay flat while the interest the fed pays out is rising sharply and will rise even further as rates increase. Can you explain your reasoning here? It seems wrong to me. The Fed has stated in speeches that they are planning on keeping trillions of securities as assets on their balance sheet. These will continue to earn billions in interest per year. Further, they do not directly "pay out interest" -- they pay out their net income to the Treasury. Rising rates on US debt does not increase what the Fed has to pay out to the Treasury except indirectly if they purchase more higher-earning assets.

missedthecue 4y ago
So the Federal Reserve pays out interest on balances deposited by banks. As of yesterday at close, the interest paid on these balances is 3.15%. https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm https://www.federalreserve.gov/monetarypolicy/reserve-balanc... While they do own assets on their balance sheet, these assets have a fixed interest rate. The interest rates stays the same as it was when they bought it. When the fed was buying these treasuries during QE, rates were very low. Less than a percent, less than even half a percent for a while. The interest rate on these interest earning assets, while it is nominally billions of dollars, will stay flat. Meanwhile, the interest it pays out to banks will increase and increase and increase. If no profit will be available, no remittances will be paid to the treasury.
- boole1854 4y ago
  Ah, I see. I thought you were trying to say the Fed directly paid interest to the Treasury. And, wow, I did not know the IORB rate had gotten so high. https://fred.stlouisfed.org/series/BOGMBBM https://fred.stlouisfed.org/series/BOGMBBM I think you are correct. With $3+ trillion in reserve balances, which aren't really expected to go down too much, the reserve interest payments are going to eat up a ton of the Fed's income.

missedthecue 4y ago

So the Federal Reserve pays out interest on balances deposited by banks. As of yesterday at close, the interest paid on these balances is 3.15%. https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm https://www.federalreserve.gov/monetarypolicy/reserve-balanc... While they do own assets on their balance sheet, these assets have a fixed interest rate. The interest rates stays the same as it was when they bought it. When the fed was buying these treasuries during QE, rates were very low. Less than a percent, less than even half a percent for a while. The interest rate on these interest earning assets, while it is nominally billions of dollars, will stay flat. Meanwhile, the interest it pays out to banks will increase and increase and increase. If no profit will be available, no remittances will be paid to the treasury.

boole1854 4y ago
Ah, I see. I thought you were trying to say the Fed directly paid interest to the Treasury. And, wow, I did not know the IORB rate had gotten so high. https://fred.stlouisfed.org/series/BOGMBBM https://fred.stlouisfed.org/series/BOGMBBM I think you are correct. With $3+ trillion in reserve balances, which aren't really expected to go down too much, the reserve interest payments are going to eat up a ton of the Fed's income.