Fed income US$105b last year, to drop off less dramatically

[NEW YORK] Profits on the Federal Reserve's vast stable of bonds dipped only slightly last year, to a net US$105 billion, and the Fed now expects income to fall off less dramatically in coming years in what could give it some political cover.

The fresh projections from the New York Fed, which manages the US central bank's assets, suggest that while remittances to the US government will drop off in coming years the decline will not be as sharp as previously thought because the Fed is expected to keep stimulus in place for longer.

The Fed expects net income to decline beginning this year and reach a trough of about US$50 billion in 2019, compared to last year's projection of a nadir of US$35 billion in 2018. It expects cumulative net profits of about US$610 billion over the next decade, a bit higher than previously expected.

Annual net income in 2015 dipped from a record US$106 billion in 2014. The Fed earned US$84 billion in 2013, and US$89 billion in 2012.

After three rounds of bond-buying meant to battle recession, the central bank has earned interest on its US$4.3 trillion portfolio of Treasury and mortgage bonds and has topped up any maturing assets.

The Fed lifted its policy rate in December, capping a year in which bond prices were volatile and mostly flat. At the same time, both Fed officials and investors increasingly predicted a slower series of rate hikes and a larger portfolio for longer. This largely explains why the New York Fed painted a brighter picture for profits in the years ahead.

The Fed aims to decide policy based on economic goals irrespective of political pressure.

Yet the projections, based on market assumptions and the expectations of primary dealers, could spell some relief for the central bank as it faces sustained political criticism for its aggressive policies and for paying some US$7 billion in interest to banks on their excess reserves last year.

While it sent a record US$97.7 billion to the Treasury in 2015, the New York Fed said that this is "likely to decline" as rates continue to rise and as policymakers eventually decide to shrink the portfolio.

Fed policymakers last month predicted rates would rise to about 3 per cent by 2018 and to not get much higher, an acknowledgement that US economic growth may be permanently lower in the post-financial-crisis era.

The portfolio is expected to reach an equilibrium size by 2022, from a previous prediction of 2020, according to the New York Fed's report to the policy-making Federal Open Market Committee.

REUTERS