Fed staff see bond portfolio earnings turn negative in coming months

The Federal Reserve Building is pictured in Washington, DC, U.S. August 22, 2018. REUTERS/Chris Wattie

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Aug 17 (Reuters) – Federal Reserve staff expect net income from holdings of more than $8 trillion of Fed bonds “to turn negative in the coming months”, it revealed on Wednesday minutes from the central bank’s July meeting.

This development potentially signals that the flow of tens of billions of dollars of income from its bond portfolio that it sends to the US Treasury each year could slow as the Fed shrinks its balance sheet.

This should not affect the ability to implement monetary policy in accordance with Federal Open Market Committee guidelines, according to the July 26-27 meeting minutes.

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Negative income would appear as a deferred asset on the Fed’s balance sheet, which would “extinguish over time as net income turns positive again in subsequent years.”

The Fed began eliminating its holdings of nearly $5.8 trillion in Treasuries and $2.7 trillion in mortgage-backed securities starting in June and aims to increase the pace of reduction to 95 billion per month starting in September. A week ago, it had reduced its overall holdings by less than $40 billion.

The Fed transfers all of the excess revenue it has generated to the Treasury each year, and those remittances have exploded in the two years of the COVID-19 pandemic, primarily because the Fed has purchased about $4.5 trillion in bond dollars during this period to support the economy through the crisis.

The Fed sent $109 billion to the Treasury last year, down from $86.9 billion in 2020 and about $55 billion in 2019.

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Reporting by Dan Burns in New York Editing by Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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