How Managing Money Creates Huge Profits For The Federal Reserve

The government is getting $100 billion this year, essentially from nowhere. It is the profit made by the Federal Reserve. The Fed is in charge of managing how many dollars are in the economy. It turns out to be a very profitable business, especially since the financial crisis, when the Fed threw an extra $3 trillion into the economy.

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Most parts of the government cost money to run, lots of money. But there's one government institution which consistently makes a very large profit in a pretty unusual way. In fact, it recently reported its most profitable year ever. David Kestenbaum with our Planet Money podcast explains.

DAVID KESTENBAUM, BYLINE: This moneymaking part of the government is actually the moneymaking part of the government, the Federal Reserve, the place in charge of how many dollars are out there, the bills in your wallet, the digital money in bank accounts. Making money turns out to be a nice little business.

JOE GAGNON: Yes, it is.

KESTENBAUM: This is Joe Gagnon. He's at the Peterson Institute, but he used to work at the Fed which last year - are you ready? - made a profit of over $100 billion. That is enough to fund the National Park Service, NASA, the National Science Foundation, the Federal Highway Administration, the Federal Aviation Administration and still have enough left over to buy everybody a nice lunch, everyone in the country.

GAGNON: Yeah. I think they're the most profitable corporation in the world, beats ExxonMobil, and it, you know, beats Apple.

KESTENBAUM: Here's how the Fed made all that profit. The Fed is not a corporation in the normal sense. It is a bank run by the government, but it is a very special bank that can do magic. It can create money out of nowhere or make it disappear.

GAGNON: It is the Fed's job to create money or to extinguish it as it sees fit. So it can literally create it out of nothing.

KESTENBAUM: After the financial crisis, the Fed decided to create a lot of money to try to get the economy going again. It created over $3 trillion dollars, basically by tapping some keys on a computer, poof. To get all that money out into the economy, it bought some boring bonds.

The Fed gives the dollars to whoever owns the bonds and the Fed takes the bonds. It bought mortgage bonds, a lot of government bonds, a huge pile of bonds worth over $3 trillion dollars. And bonds pay interest. That is where the $100 billion in profit came from. The Fed wasn't trying to make a profit, but in managing the amount of money in the economy, it did.

Now, if I were running the Fed, and I had $100 billion in profit to contribute to the rest the government, there would be a big ceremony with an oversized paper check, a one with 11 zeros after it. But I'm not running the Fed.

GAGNON: No, these things are all electronic these days. And it's - treasury bonds don't exist except as, you know, entries and memory chips or whatever in computers.

KESTENBAUM: That's so weird.

GAGNON: Yeah.

KESTENBAUM: Weirder for me is the question of where this $100 billion is coming from. Like, in a deep sense, whose pocket does it come from? Traditionally, Gagnon says, the answer would be that it comes from all of our pockets because when you create as much money as the Fed did, you get a bit of inflation, making every dollar in your pocket or bank account worth a little less. But the government tracks inflation. It goes out and measures it. And we have almost no inflation right now.

GAGNON: We're just in a really weird time where massive amounts of money creation are not causing inflation. It's almost - it is unprecedented, to my understanding of economic history. This has never really happened before.

KESTENBAUM: So $100 billion that will be spent on the military and scientific research and roads this year came basically from nowhere. That's the best answer I can give you. David Kestenbaum, NPR News.

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