Should the Fed send billions to banks but not a dime to taxpayers?

In all the hue and cry about the Federal Reserve’s efforts to raise interest rates to quench the inflationary flames, not much has been said about how these higher rates are raising the Fed’s own payments to banks for money held in reserve — to the tune of around $100 billion this year. This at a time when the Fed itself is apparently running a monthly deficit, the first since 1915, and unable send one thin dime to U.S. taxpayers.

Where does the Fed get all that money? What happens when the money spigot closes? And does it all make sense?

Fed revenues come from interest and capital gains earned on vast holdings of government bonds, as well as for services rendered to Fed member banks. Each year, the Fed normally makes enough money to send a large payment to the U.S. Treasury, and this provides a welcome benefit to U.S. taxpayers. Last year, the Fed sent out a net $107 billion, and the year before $86 billion. This year, the Fed expects to operate with a loss.

Part of tightening the monetary screws means selling off interest-bearing securities and not replacing them. Simply put, Fed revenue is down and Fed costs are up, partly due to accelerating interest payments to banks. We taxpayers are in for leaner times.

A quick look at some numbers will shed light on the bank part of the story. At the end of October, bank reserves held at the Fed totaled a bit more than $3.05 trillion. The current interest rate paid on reserves is 4.40 percent. This…

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