Fed pays US Treasury $86.9 billion, largest sum in 4 years

FILE - The Federal Reserve is seen in Washington, in this Nov. 16, 2020 file photo. The Federal Reserve reported Monday, March 22, 2021, that it earned $88.6 billion in 2020 and paid back to the federal government $86.9 billion, the largest Fed payment to the government in four years. (AP Photo/J. Scott Applewhite, File) (J. Scott Applewhite, Copyright 2020 The Associated Press. All rights reserved)

WASHINGTON – The Federal Reserve reported Monday that it earned $88.6 billion in 2020 and paid back to the federal government $86.9 billion, the largest Fed payment to the government in four years.

The Fed said that its earnings were up $33.1 billion last year, a gain that reflected falling interest rates which meant the central bank paid commercial banks less in interest payments on bank reserves that the Fed requires them to keep.

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The $86.9 billion in payments to the U.S. Treasury was a 58.3% increase from the Fed's payment of $54.9 billion in 2019. It was the largest amount since the Fed paid the Treasury $91.5 billion in 2016.

However, the circumstances surrounding the increase are different. In 2016, the Fed had a sizable balance sheet containing large increases in its holdings of Treasury securities and mortgage-backed securities for which is was earning hefty returns.

The Fed began increasing its balance sheet last spring by $120 billion per month to help support the economy during the coronavirus pandemic. But this time, interest rates are much lower than they were following the 2008 financial crisis.

Those lower interest rates mean the Fed did not see the sizable earnings increase from its securities holdings this time around. Instead interest income on its securities holdings totaled $101.2 billion, a decrease of $1.6 billion from the previous year despite the bigger size of the holdings.

However, the Fed's earnings for the full year did increase because the amount it had to pay to banks in interest payments on their reserves fell to $7.9 billion, a decrease in Fed payments of $27.1 billion from the previous year.

The Fed's audited financial report differed only slightly from a preliminary report released in January which showed the Fed paid the Treasury $88.5 billion, slightly smaller than the final accounting of a payment of $86.9 billion.

The Fed created a number of support programs to prop up the financial system after it came under severe stress when the pandemic hit in March 2020. The audited financial statement showed that only the Main Street lending program suffered a loss which was projected to total $2.4 billion.

However, under the emergency relief programs established by Congress, that loss, if it is realized, would be covered by funds supplied by the Treasury Department.