At the end of last week, the Federal Reserve released a preliminary estimate of its 2014 net income. And by the looks of it, our central bank is doing all right for itself.
According to the press release, the Fed earned a total of $101.5 billion during the 12 months ended Dec. 31. If anyone's keeping score, that's 11% higher than 2013.
But while this figure is impressive in and of itself, think of it this way: It's two and a half times the trailing-12-month earnings of Apple, the world's most profitable company. It's even more so after accounting for the size of the Fed's balance sheet.
Since the onset of the financial crisis, the central bank has acquired roughly $3.5 trillion in assets, leaving it with a total of $4.5 trillion today. Thus, if you take $101.5 billion in net income divided by $4.5 trillion in total assets, you get a return on assets of 2.2%.
For those of you who don't follow the ins and outs of banking, that's a remarkable number. According to the FDIC, for instance, the average bank returned only 1% on its assets in the most recent quarter.
Now, of course, there are good reasons for this.
In the first case, unlike a typical bank, the Fed doesn't have to pay interest expense on the funds that it uses to acquire and hold assets. Instead of borrowing money from depositors or institutional investors, it simply creates it out of thin air.
And in the second case, despite the fact that the Fed has an unprecedentedly large balance sheet, it does so with, give or take, only 20,000 employees. By comparison, JPMorgan Chase employs nearly 139,000 people to monetize its $2.5 trillion balance sheet.
Now, of course, this isn't an apples-to-apples analogy either, as JPMorgan operates dozens of business lines that generate a variety of different types of income. In addition, it has to comply with a myriad of legal and regulatory mandates promulgated by the Fed and other regulators.
But you nevertheless get the point -- namely, that the Fed makes a lot of money with a somewhat surprisingly small number of people.
And who, pray tell, is the fortuitous beneficiary of this largess? That would be the federal government -- or, more specifically, the U.S. Treasury Department -- which received approximately $98.7 billion of the Fed's earnings last year.
While this may seem like an afterthought, I don't think it is. I say that because it isn't unreasonable to assume that the federal government will become accustomed to this abundant (and essentially free) source of financing. The net result is that the Fed may have a strong disincentive to deleverage from the financial crisis, and thus surrender its considerable interest income.
At the end of the day, in turn, far from a $4.5 trillion balance sheet being an exception to the rule for the Fed, it could now be the new normal.
