WASHINGTON – The Federal Reserve is paying a record $78.4 billion in earnings to the U.S. government, reflecting gains from the central bank's unconventional efforts to lift the economy.
The payment to the Treasury Department for 2010 is the largest since the Fed began operating in 1914. It surpasses the previous record $47.4 billion paid in 2009, the Fed said Monday.
The bigger payment mostly came from more income generated by the Fed's massive portfolio of securities, which includes Treasury debt and mortgage securities.
Critics in Congress have expressed concerns that the Fed's purchases could put taxpayers at risk by reducing the amount turned over to Treasury. The Fed is funded from interest earned on its portfolio of securities. It is not funded by Congress. After covering its expenses, the Fed gives what is left over to the Treasury Department.
Income from the Fed's portfolio of securities came to $76.2 billion last year, up from $48.8 billion in 2009, Federal Reserve officials said. Such income rose largely because the Fed bought a greater number of securities. Increases in the value of securities also played a role.
In early November, the Fed launched a program to bolster the economy by purchasing $600 billion worth of Treasury debt through June. The program aims to boost the economy by lowering rates on mortgages and other loans and by lifting stock prices. Republicans in Congress and others have criticized the program, saying the Fed is printing money to pay for the U.S. government's swollen deficits and debt.
To fight the financial crisis and lift the country out of recession, the Fed bought $1.4 trillion of mortgage-backed securities and mortgage debt as well as up to $300 billion worth of government debt. The Fed completed the mortgage purchases last year.
The purchase programs have helped boost the value of securities held by the Fed.
But the Fed could lose money if the central bank had to sell those securities and their prices were to fall. Once the economy is on firm footing, the Fed will need to mop up some of the money it pumped into the economy. The Fed could do that by selling some securities to reduce its balance sheet to a more normal size.
Federal Reserve Chairman Ben Bernanke has said the Fed's goal is to eventually return the portfolio back to holdings of only Treasury securities. The Fed's balance sheet now stands at $2.4 trillion, nearly triple its size from before the financial and economic crises.
The Fed's securities could lose value if low interest rates shoot up. That means the Fed would pay the government less money — or none under some circumstances.
"It's possible that there might come a period where we don't remit anything to the Treasury for a couple of years," Bernanke told the Senate Budget Committee last week. "That would be, I think, the worst-case scenario."
Bernanke said in most cases the Fed will continue to return to Treasury "significant amounts of money."
The figures provided by the Fed on Monday are preliminary, unaudited results. Final results will be released later this year.
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