Fed bond purchases sent nearly $80 billion Treasury’s way in 2013

Kevin G. Hall

The Federal Reserve’s controversial bond-buying program, designed to stimulate the U.S. economy, generated interest income of $90 billion in 2013, an audit of the central bank confirmed Friday.

The Fed released an annual audit of its financial operations for 2013, conducted by the giant accounting firm Deloitte & Touche LLP. The documents show that the massive purchases of government and mortgage bonds _ an effort known as quantitative easing _ generated almost $10 billion more than the prior year.

Senior Fed officials, speaking on condition of anonymity as a matter of policy, said that after subtracting out operating expenses of $6.1 billion and almost $5 billion on interest expenses paid on deposits held at Fed banks, the Fed remitted to the Treasury just under $80 billion.

That’s enough to fund the Departments of Justice, Interior, Energy and Commerce for all of next year in President Barack Obama’s recently released proposed budget.

During 2013, the Fed purchased every month $85 billion in government and mortgage bonds in a bid to keep longer-term interest rates at historic lows and spur risk-taking in financial markets. The effort was designed to help revive the moribund housing sector and to force investors into stocks and commodities. Both moves sought to boost household wealth and economic activity.

The stock market responded by going on a tear in 2013, but it has struggled to find its footing of late after the Fed began tapering back its purchases of bonds. It did so in January and February, each month cutting back the purchases by $10 billion to a current rate of $65 billion a month.

The policy-making Federal Open Market Committee meets Tuesday and Wednesday, and new Fed chief Janet Yellen holds her first news conference Wednesday. She’s expected to announce further slowing in the pace of purchases.

Quantitative easing is controversial because it distorts the free-market pricing of financial assets, changing the relative attractiveness of, say, stocks over bonds. As the Fed has started to pull back, many international investors also have been simultaneously pulling back on investments in Brazil and other large developing economies, willing to settle for smaller but less risky returns at home.

The Fed’s total assets as of Dec. 31 were $4 trillion, a full $1.1 trillion higher than at the close of 2012. This is one reason why some critics of the Fed fear that eventually the bond purchases will result in higher inflation. There’ll be so much credit available for lending, the theory goes, that the economy will heat up faster than the Fed raises interest rates to slow inflation.

Defined as the rise of prices across the economy, inflation eats away at the purchasing power of consumers and businesses alike. The Fed tries to keep inflation in a range of 1 percent to 2 percent. For much of last year, however, the goal of the bond purchases was to combat deflation, or the fall in prices across the economy. Deflation leaves consumers and businesses on the sidelines, holding off on purchases in hopes of even lower prices, sparking a downward spiral in the economy.

The Fed also released detailed audits of three limited liability companies it created during the financial crisis of 2008, taking over assets of failed investment bank Bear Stearns and insurance and finance giant American International Group. The largest of these three companies, called Maiden Lane LLC, had assets of over $1.7 billion in 2013, slightly below the prior year.

The audit also showed that the Consumer Finance Protection Bureau, created under the sweeping 2010 revamp of financial regulation, was funded at a level of $563 million in 2013, after being funded at $385 million in 2012. While much higher than the previous year, it is below the $597.6 million it was entitled to last year.

By Kevin G. Hall
McClatchy Washington Bureau