Despite 2008’s plummeting short-term interest rates that ended the year near zero, the Federal Reserve accounts show the central bank raked in substantially for the year.
From The Economist: [Federal Reserves’] 2008 annual accounts, released on April 23rd, would turn many a hedge-fund manager green with envy.
Like Wall Street’s finest, the Fed makes money on a spread…
In FY2008 the central bank posted a whopping $43 billion in operating profits (Fed’s main source of funds results from the difference in the cost of printing money and the face value of that money.)
That was more or less the same level as in 2007….short-term interest rates..ended the year [2008] near zero. That should have clobbered Fed income, as rate cuts did in the early days of the last recovery in 2002-04.
But it did not, for two reasons. First, to shore up financial markets the Fed has pumped up its balance-sheet—its total assets were $2.2 trillion on December 31st, more than double their level of a year earlier. Second, it has been trading in low-risk, low-return Treasury debt and buying higher-yielding private debt—discount loans to banks, commercial paper, and mortgage-backed securities….
emphasis added
Can’t say the Fed isn’t playing loose and free with the potential losses to the taxpayer. But hopefully, Bernanke & co. will be able to maneuver and adapt to market dynamics, and avoid in the process a hit big enough to wipe out years of profits.
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