The Federal Reserve is subject to a dual mandate of price stability and maximum sustainable employment. In the course of achieving these goals, the Fed generates income and incurs costs:
- Income is earned from interest earned on securities acquired through its open market operations and from regulatory and supervisory fees.
- Costs are incurred from paying interest on reserve balances, interest on securities sold under agreements to repurchase (reverse repos), and operational costs such as payroll.
The Fed’s income typically exceeds the cost of its operations. By law, the Fed’s excess earnings must be turned over to the US Treasury as remittances. The FRED graph above shows the weekly excess earnings that are turned over to the US Treasury. From 2012 until 2021, the Federal Reserve remitted over $800 billion to the US Treasury. However, what happens when the Fed’s costs are greater than its income?
When the Fed’s costs exceed its income, the Fed creates a “deferred asset,”
which is a negative liability whose value equals the cumulative shortfall in earnings. Once the Fed returns to earning a positive net income, it will pay down the value of the deferred asset until it reaches zero, at which point the Fed will resume sending remittances to the Treasury. This graph shows that the Fed’s costs started exceeding its income in September 2022, after the rapid increase in policy rates and the corresponding increase in the Fed’s interest costs.
Note that this data series from the Board of Governors provides a flow when positive, but a stock when negative. That is, when the Fed’s net income is positive, this series reports the weekly amount that is remitted to the US Treasury. When the Fed’s net income is negative, this series records the value of the deferred asset, which corresponds to the cumulative value of the negative net income incurred by the Fed. To compute weekly net income when this income is negative, one must then take the difference of the weekly series. This is why the series appears extremely negative over the past year: It reports the total value of the deferred asset, not the weekly flow.
In FRED, when a deferred asset exists, one can still compute the weekly flow of net income by editing the graph and switching the units to “Change, Millions of U.S. Dollars,” as below. Note that this will only represent the flow for weeks when the Fed’s deferred asset is positive and was also positive for the prior week. Note also that the amplitude of this change in deferred assets is similar to when the Fed is making remittances, as in the first graph.
How these graphs were created: Search FRED for and select “Liabilities and Capital: Liabilities: Earnings Remittances Due to the U.S. Treasury: Wednesday Level.” You have the second graph. End the sample period on 2022-08-31 and you have the first graph. For the third graph, start the sample on 2022-09-21, click on “Edit graph,” and change units to “Change, Millions of U.S. Dollars.”
Suggested by Miguel Faria-e-Castro and Samuel Jordan-Wood.