Feeding the Fed

What is the Fed?

The Federal Reserve System was conceived 100 years ago on a small island off the coast of Georgia to bring order to a fractious and crisis-prone banking system. A century later we have the most powerful and influential financial institution in the world. We also have one heck of a business.

Technically, the Fed is owned by the various national banks around the country. Each one owns Federal Reserve Bank stock. And because the Fed owns almost $4 trillion in bonds, it makes a boat-load of money: $88 billion in 2012, $77 billion last year. To put this in perspective, that’s twice the earnings of Exxon Mobil. And it sends these earnings back to the US Treasury Department, easing the Federal Government’s deficit.

This isn’t anything new. The Fed has been remitting its excess interest income to the Treasury since 1947. They do this by setting an interest rate on currency that banks hold with them—and paying that interest to Treasury. But that interest rate is artificial. There’s no law that requires the Fed to pay anything to anyone.

The last public/private financial corporation with such a huge balance sheet was Fannie Mae. That didn’t work out so well. Let’s hope Janet Yellen’s leadership can keep the Fed on sounder footing.

Douglas R. Tengdin, CFA

Chief Investment Officer

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