Congress established the Fed in 1913 as an independent central bank, minimally accountable to Congress and the Executive branch. The intent behind granting Fed “independence” was to keep politics out of its management of the US money supply and interest rates. Unique among the world’s central banks, the 12-district Fed system is owned by its member banks, a group that includes all federally-chartered banks and those state-chartered banks who opt to join the Fed system. Each of these member banks is required to maintain non-marketable capital stock of its respective Fed district bank, on which banks receive 6 percent annual dividends.

Unlike other congressionally-created independent agencies, the Fed receives no funding in the federal budget. Rather, the Fed’s main source of income is the interest it earns on its $6.5 trillion portfolio of US Treasury bonds and mortgage-backed securities that it holds on its balance sheet in the course of executing its monetary policy. The Fed also receives some fee-based income for its regulatory and supervisory services to the banking industry.

The Fed’s expenditures include its own operating costs, such as salaries and overhead, interest paid on commercial banks’ reserves held at the Fed, dividends paid on its member banks’ ownership of capital stock in their respective Fed district banks, and as much financial support to the Consumer Financial Protection Bureau (CFPB) as its director requests to fund its operations. Thanks to the 2010 Dodd-Frank law that created the CFPB, the bureau is uniquely housed within the Fed, unlike any other federal agency.

By law, any Fed “profits” (excess earnings after covering its own expenses and those aforementioned obligations) are to be transferred to the US Treasury Department to support ongoing federal expenditures. These remittances to the Treasury benefit taxpayers; any missed payment imposes a cost on taxpayers.

With no earnings, how can the Fed provide financial support to CFPB? AEI economist, Paul Kupiec, surmises that the Fed borrows funds from the bank reserves that the banking industry holds on deposit at the twelve Fed district banks. Yet, as he points out, he is not aware that the Fed is legally authorized to borrow to fund another government agency such as CFPB.

Yet another disconcerting possibility arises, because of the Fed’s unique power to create bank credit out of “thin air,” a power shared with other central banks around the world. Such credit creation—sometimes euphemistically referred to as “printing money”—is accomplished by buying assets such as Treasury securities on the open market, which monetizes the debt.

The Fed also has the power to literally print money, that is, to issue US currency without limit, creating an automatic profit for itself. This profit is technically referred to as seigniorage, which represents the difference between the face value of currency and its inherent cost of production. For example, a $100 Federal Reserve Note (our US currency) costs only 12.6 cents to produce but has purchasing power of $100, giving the Fed an instant $99.874 profit that could be put to any use of its choice.

Both techniques of “printing money” can generate spendable funds that the Fed could use to support CFPB, or pay dividends and interest to banks—or possibly the missing profit remittances to Treasury. This strategy, however, would certainly result in rapid price inflation and US dollar depreciation by increasing the US money supply. In fact, the first method of printing money by buying Treasury securities is exactly what caused the 2022-24 run-up of price inflation as the US Treasury issued large amounts of covid-related debt and the Fed obliged by creating new bank credit in order to buy this debt in the open market.

Are We There Yet?

While on the Fed’s magic carpet trip, Americans may well raise many questions: how long will the magic carpet trip last, and how does it end? How much will the Fed’s deficit spending ultimately cost taxpayers? How long will it be until the Fed can repay those deferred assets accumulating every year that the Fed misses its profit remittances to Treasury? Do people in high places understand what the Fed is doing? And, if they understand, are they motivated to investigate further in order to take some corrective action?