Financial Update (First Quarter 2004)



FEATURES

 Directors Under
 More Scrutiny

 Fed Studies Checks
 and E-payments

 Mexican Secondary
 Mortgage Market

 Fed Emphasizes
 CIBCA Compliance

 Guynn Stresses
 Long-Term Policy

 Kohn Says U.S. Is
 Key in World
 Economy

 New Tool for
 Community
 Developers

 New Sixth
 District Directors

 Two Newsletters
 Launched

DEPARTMENTS

 Did You Know?

 Data Bank

 Circular Letters

STAFF

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Federal Reserve Banks Earn Income,
Return Vast Majority to U.S. Treasury

Many people know that Federal Reserve Banks are not part of the U.S. government, but what most don’t realize is that Reserve Banks earn income that is returned to the U.S. Treasury each year. In fact, since the Federal Reserve System began operations in 1914, Reserve Banks have returned approximately 95 percent of their net income to the Treasury.

Interest and fees
Federal Reserve Banks derive their income primarily from the interest earned on U.S. government securities that the Fed has acquired to conduct monetary policy. The Fed also receives income from the fees Reserve Banks charge financial institutions for processing payments, such as checks, fund transfers, and automated clearinghouse transactions. In addition, Reserve Banks derive income from earnings on foreign currencies and earnings from loans as well as from other sources.

In January the Fed announced that the Reserve Banks paid $21.997 billion of their $22.981 billion net income to the U.S. Treasury (see the table). The income not paid to the U.S. Treasury funded the operating expenses of the 12 Reserve Banks and the Fed’s Board of Governors in Washington, D.C.

Earning its income
By earning its own income, the Federal Reserve does not receive appropriations from the U.S Congress. Why is that arrangement important? To answer this question, one must go back to the founding of the Fed in 1913.

The Federal Reserve was established as an independent central bank, so its decisions do not have to be ratified by the president or Congress. The entire Federal Reserve System, however, was created by Congress and is subject to its oversight. To maintain its independence, the Fed was created with public and private aspects. The Federal Reserve’s Board of Governors is a government agency, but the 12 Reserve Banks were set up to operate independently.

Through this structure and the way the Reserve Banks receive their funding, monetary policymakers can independently make decisions that are in the best interest of the nation’s economy in the long term versus being swayed by any short-term political concerns.

Federal Reserve Net Income
and Payments to U.S. Treasury
(millions of dollars)
  Net Income Payments
to Treasury
Percent of
net income
1999 26,262 25,410 96.7
2000 29,868 25,344 84.8
2001 28,035 27,089 96.6
2002 26,048 24,496 94.0
2003* 22,981 21,997 95.7
 
*Preliminary
 
Source: Federal Reserve Board of Governors’ press releases and annual reports

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