From the Vault: Monetary Policy and Government Finances
Each year, the manager of the Federal Reserve’s System Open Market Account (SOMA) submits an accounting of open market operations and other developments influencing the composition and performance of the Fed’s balance sheet to the Federal Open Market Committee (FOMC).
This year’s report, Domestic Open Market Operations in 2014, released in April, drew attention to the fact that net income from the SOMA securities portfolio (expanded in part through the Fed’s large-scale asset purchases, or LSAPs) and remittances to U.S. Treasury have been significantly above average in recent years. It also points readers to a post on Liberty Street Economics about how to interpret a sharp decline in net income and remittances that’s projected once the FOMC lifts its target range for the federal funds rate and allows the portfolio to shrink.
While increased interest expense on reserve balances and potential losses in the case of asset sales would lead to lower Fed earnings (and possibly zero remittances for some time), the bloggers argue that LSAPs were nonetheless “a good idea” from a taxpayer’s point of view. “In principle, it is possible that returns to asset purchases, if measured narrowly by net income, could be negative, but the overall fiscal effect is still positive,” they explain.
Check out “More Than Meets the Eye: Some Fiscal Implications of Monetary Policy” for analysis of the multiple ways in which LSAPs and broader monetary policy influence the economy—and the government’s tax revenues and expenditures—not just the “more easily observable” remittances to Treasury.
The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.
Anna Snider is a cross-media editor in the Federal Reserve Bank of New York’s Research and Statistics Group.