Record 2014 income on Fed portfolio seen dropping

[NEW YORK] The record US$106 billion in net income on the Federal Reserve's portfolio of assets last year is seen dipping to a third of that size by 2018, according to an annual report by the New York Fed.

The New York Fed's projections, based on bond market assumptions and surveys of primary dealers, see net income falling to about US$35 billion by 2018, with the portfolio reaching an equilibrium size by the end of 2020.

Income estimates are lower than last year's projections largely because the Fed is now expected to raise interest rates sooner. Over the next decade, cumulative net income is projected to be about US$600 billion, or US$25 billion lower than forecast last year.

Since the financial crisis, the US central bank's three huge rounds of stimulative bond buying have left it swollen with almost US$4.5 trillion in Treasury and mortgage bonds. It earns interest on the assets and transfers that income to the US government.

Annual remittances to the Treasury, which also hit a record of US$97 billion last year, are seen declining along with net income as borrowing costs rise across the economy in the years ahead.

Lower net income "suggest a greater likelihood of near-zero or even zero remittances to the Treasury for a time," the New York Fed said in its report to the policy-setting Federal Open Market Committee.

Even so, it said, remittances should remain positive and net income "is very likely to remain quite high over the projection period, even under several alternative scenarios." The net US$106 billion in 2014 is up from US$84 billion in 2013 and US$89 billion in 2012.

The portfolio also swung to an unrealized gain of US$175 billion at the end of last year, compared with an unrealized loss of US$53 billion a year earlier, largely due to rising bond prices throughout 2014.

The projections see 55 per cent Treasuries and 45 per cent agency mortgage-backed securities in the portfolio by late 2020.

REUTERS