Fed officials expect net yields on its more than $8 trillion bond holdings “to turn negative in the coming months,” data from the Fed’s July meeting released on Wednesday showed. That could mean that the billions of dollars that are earned each year from bond portfolios and flow into the Treasury could be reduced as the Fed shrinks its balance sheet .
Based on the July meeting, this should not affect the Fed’s monetary policy . This lost revenue could be listed as a “deferred asset” on the Fed’s balance sheet and wiped out as yields turn positive.
The Fed began reducing its holdings of nearly $5.8 trillion in Treasuries and $2.7 trillion in mortgage-backed securities in June, and plans to accelerate the pace of reductions to $95 billion a month starting in September. Its total holdings had fallen by less than $40 billion as of a week ago.
The Fed transfers any excess earnings it generates to the Treasury each year, and those remittances have exploded in the two years of the Covid-19 pandemic, largely because the Fed has bought about $4.5 trillion in bonds to support the economy during that time.
The Fed handed over $109 billion to the Treasury Department last year, up from $86.9 billion in 2020 and about $55 billion in 2019.