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.