Dr. Econ: Where does the Federal Reserve get the money
to fund its operations?
Now that’s a $30 billion dollar question, at least
for the year 2005!
First, you should know that the Federal
Reserve System was
created by Congress to be self-financed and therefore is
not subject to the congressional budgetary process. In this
way, the Fed is considered to be “independent within government.”
Second, the quick answer to your question about how the
Fed is funded can be found on the Board of Governors of the
Federal Reserve System’s website:
The Federal Reserve's income is derived primarily from the
interest on U.S. government securities that it has acquired
through open market operations. Other sources of income are
the interest on foreign currency investments held by the
System; fees received for services provided to depository
institutions, such as check clearing, funds transfers, and
automated clearinghouse operations; and interest on loans
to depository institutions (the rate on which is the so-called
discount rate). After paying its expenses, the Federal Reserve
turns the rest of its earnings over to the U.S. Treasury.
For a short description of the Federal Reserve System’s
annual revenues and expenditures, you should check out the
Board’s annual press release, usually released in January.
It provides a brief description of the prior year's Reserve
Bank income and expense data and transfers to the Treasury.
release of January 10, 2006, providing information for
2005 is shown below:
Press Release: January 10, 2006
Federal Reserve System income is derived primarily from
interest earned on U.S. government securities that the Federal
has acquired through open market operations. This income
amounted to $28.959 billion in 2005. Additionally, income
from fees for the provision of priced services to depository
institutions totaled $901 million. The remaining income
of $386 million includes earnings on foreign currencies,
earnings from loans, and other income.
The operating expenses of the twelve Reserve Banks totaled
$2.193 billion in 2005, including the System's net pension
credit. In addition, the cost of earnings credits granted
to depository institutions amounted to $212 million. Assessments
against Reserve Banks for Board expenditures totaled $266
million and the cost of currency amounted to $477 million.
Net deductions to income amounted to $3.577 billion, primarily
representing unrealized losses on assets denominated in
foreign currencies that are revalued to reflect current market
Total net income for the Federal Reserve Banks in 2005
amounted to $23.521 billion. Under the Board's policy, each
Bank's net income after the statutory dividends of $781
million to member banks and the $1.286 billion necessary
surplus to paid-in capital is transferred to the U.S. Treasury.
Here’s a chart to give you a visual representation
of the information in the press release:
For additional information on the balance sheet of the Federal
Reserve System and the Federal Reserve Banks, be sure to
visit the website for the weekly Federal Reserve Statistical
Factors Affecting Reserve Balances. Table 2, Consolidated
Statement of Condition of All Federal Reserve Banks, shows
the Fed’s assets ($854.9 billion
as of May 31, 2006) and liabilities, including the amount
that banks and thrifts hold on deposit at the Federal Reserve
Banks ($23.4 billion). The largest single category of assets
on the Fed’s books are U.S. Treasury securities held
outright ($762.4 billion). The largest single liability category
is Federal Reserve notes (currency) ($762.0 billion).
Report. (2006) Board of Governors of the Federal
Reserve System. Washington D.C., June 2006.
Purposes & Functions. (2005) Board of Governors of
the Federal Reserve System. Washington, D.C., June 2005.