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Home Publications Blogs Beat the Press The Fed Reduces the Deficits

The Fed Reduces the Deficits

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Tuesday, 11 January 2011 05:52

The NYT reported on the Federal Reserve Board's payment of $78.4 billion to the Treasury in 2010. The Fed earned this money on the mortgage-backed securities and government bonds that it bought to boost the economy. The payment is equal to almost 40 percent of the net interest paid out by the federal government last year.

The government's budget projections show the Fed's payments to the Treasury shrinking drastically over the next decade. However, it is worth noting this is a policy choice.

The Federal Reserve could buy and hold more debt in the year ahead, thereby alleviating the interest burden on future budgets created by the deficits needed to boost the economy out of recession. To limit the potential inflationary impact of the additional reserves placed in the system the Fed could raise the reserve requirements banks. If the country was having an honest debate on the long-term deficit, in which everything is "on the table," then this would be one of the items on the policy agenda. It is worth noting that banks would not want to see their reserve requirements raised.

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written by skeptonomist, January 11, 2011 9:04
The Fed really has yet to buy large quantities of long-term Treasury and agency bonds. QE1 was mostly MBS's and there will probably be a large loss on these things - though we may never find out how much, since one object of QE1 was probably to hide the extent of the problem. QE2 is buying mid-term bonds, the yields on which were extremely low, though they shot up the day after the announcement of QE2.

It should be abundantly clear by now that the "inflationary impact" of bank reserves is essentially nil, at least under present circumstances. Those who think that the Fed can decrease deflationary pressures are reduced to calling on the moral effect of the Fed's promise not to raise rates in the future. Isn't it about time that economists gave up on the dogma that the Fed controls inflation, or even "money" (whatever that is)?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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