Fed payouts to Treasury boost government's fiscal picture

The government can thank the Federal Reserve in part for a rosier fiscal outlook.

The Congressional Budget Office (CBO) reported Wednesday that this year’s federal deficit will come in around $506 billion. That number is up slightly from earlier estimates, but down significantly from the $680 billion the government recorded in fiscal 2013.


The Fed’s payouts to the Treasury Department played a significant role in that improvement, according to the CBO.

The budget office reported Wednesday that it expects the Fed to hand over more than $100 billion to the Treasury in fiscal 2014, up $25 billion from fiscal 2013 levels. That’s roughly a 33 percent increase from the prior year.

The central bank’s heftier handout is thanks to the continued expansion of its portfolio from its bond-buying stimulus program and the return on those investments.

Under law, whatever profits the Fed makes in the course of its operations must be handed over to the Treasury after covering the central bank’s operating costs. As the bank has bought huge numbers of bonds in recent years, the amount of money it reaps in interest similarly has increased.

The Fed’s balance sheet boomed when the central bank took the unprecedented step of buying hundreds of billions of dollars in bonds in a bid to further lower borrowing costs and spur the economy. According to its latest report, the total stands at roughly $4.4 trillion and is still growing, albeit more slowly.

The Fed sent the Treasury $77.7 billion in 2013, slightly below the record amount it sent in 2012 of $88.4 billion.

The Fed is slowly exiting its latest effort to boost the economy via a third round of the stimulus program, known as "quantitative easing." The central bank is slowly shrinking the size of its monthly bond purchases under the program and aims to stop buying bonds sometime this fall. Currently, the Fed is buying $25 billion of bonds a month, and has so far pared down the size of its purchases by $10 billion each time its directors meet to update policy.

But while the Treasury’s books have gotten a boost from the Fed in recent years, the CBO cautioned that as that stimulus dries up, so too will the additional revenue. While payments to Treasury will amount to a record level of 0.6 percent of gross domestic product this year, the CBO expects it to fall to 0.2 percent of GDP by 2024.