Fed staff sees bond portfolio income turning negative in coming months
2022.08.18 00:09
FILE PHOTO: The Federal Reserve building is pictured in Washington, D.C., U.S., August 22, 2018. REUTERS/Chris Wattie
(Reuters) – Federal Reserve staff expect the net income from the Fed’s holdings of more than $8 trillion of bonds to “turn negative in coming months,” a readout of the central bank’s July meeting showed on Wednesday.
The development potentially signals that the stream of tens of billions of dollars from income earned from its bond portfolio that it has been sending annually to the U.S. Treasury may slow as the Fed shrinks its balance sheet.
It should not affect the ability to implement monetary policy as directed by the Federal Open Market Committee, according to minutes of the July 26-27 meeting.
The negative income would be shown as a deferred asset on the Fed’s balance sheet, which “would be extinguished over time as net income turned positive again in later years.”
The Fed began culling its holdings of nearly $5.8 trillion of Treasuries and $2.7 trillion of mortgage-backed securities starting in June and aims to increase the pace of reduction to $95 billion a month starting in September. As of a week ago, it had reduced its overall holdings by less than $40 billion.
The Fed turns any excess earnings it has generated to the Treasury each year, and those remittances have exploded in the two years of the COVID-19 pandemic, mostly because the Fed bought about $4.5 trillion of bonds in that period to support the economy through the crisis.
Last year, the Fed sent $109 billion to the Treasury, up from $86.9 billion in 2020 and about $55 billion in 2019.
