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Federal Reserve’s MBS Purchases Could Lead to Record Earnings of $70B

Posted By Carrie Bay On May 26, 2010 @ 6:36 pm In Government,Market Studies,Secondary Market | No Comments

Over the past several years, the nation has experienced its most severe financial crisis since the Great Depression of the 1930s. A ""report released this week"":http://www.cbo.gov/ftpdocs/115xx/doc11524/05-24-FederalReserve.pdf by the[IMAGE]

Congressional Budget Office (CBO) describes actions taken by policymakers to stabilize financial markets during the downturn as ""extraordinary.""

Through its efforts, the ""U.S. Federal Reserve"":http://www.federalreserve.gov more than doubled the size of its asset portfolio to over $2 trillion and assumed far more risk than is considered ""normal"" for the central bank, according to the CBO study. The majority of

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these assets were mortgage-backed securities (MBS) purchased through a Federal Reserve program intended to keep mortgage rates low to stoke demand for the fragile housing market.

The risk-taking Fed is proving to be a savoir-faire investor. According to CBO estimates, the central bank's MBS investments and other crisis-mode assets will turn a record $70 billion profit for the Federal Reserve this year.

In 2009, the Federal Reserve earned $46 billion from interest yields on its assets. At that time, the windfall was the biggest annual return the Fed had recorded in its 95-year history.

The central bank earns interest income from its holdings of Treasury securities, loans to banks, and its holdings of housing debt, and according to the CBO, the Fed’s on track to see a lot more green as a result of its efforts to prop up the faltering housing market and the nation’s financial system.

“The Federal Reserve’s actions to stabilize the financial markets are likely to significantly increase the amount of its remittances [non-operating income that it turns over to the Treasury] over the next few years,” the CBO wrote.


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