The Federal Reserve paid $12 billion in interest to banks in 2016, the central bank announced Tuesday, cutting into the payments it sent to the Treasury.
The Federal Reserve Board of Governors announced that the central bank sent $92 billion to the Treasury, down from $97.7 billion in 2015.
The central bank’s income comes from its $4.5 trillion holdings of assets, mostly government bonds and mortgage-backed securities guaranteed by the federal government.
Its payments to the Treasury have generally increased over the economic recovery, as it built up its portfolio through repeated rounds of quantitative easing, or massive asset purchases, meant to boost the economy.
Yet the situation is set to change as the recovery takes hold and interest rates rise from the very low levels that have prevailed since the financial crisis.
Since 2008, the Fed has paid banks for all the reserves they hold at the central bank. Currently, banks have nearly $2 trillion in excess reserves at the Fed.
Those payments will increase as the Fed moves to raise rates over the next few years. One of the Fed’s instruments for raising short-term rates is increasing the rate paid on excess reserves. In December, it raised the rate paid from 0.5 percent to 0.75 percent.
That plan for raising rates suggests that the Fed could pay out hundreds of billions of dollars to banks in the years ahead, creating appearances that Fed watchers warn could create political risks for the Fed.
Fed Chairwoman Janet Yellen has brushed off that possibility, saying in June that it was “very unlikely” that the Fed could lose money in a year.
