Some of you may wonder why the Fed wouldn't start losing money when rate on reserve deposits was raised to my assumed return of 3% on the Fed's bond portfolio:
- The Fed owns $4.2 trillion in bonds. (returning $126 billion)
- Only $2.6 trillion is funded by reserve deposits which pay interest. (costing $6.7 billion)
- There is another $225 billion funding in reverse repos (more money belonging to US banks) that costs the Fed Funds Rate (0.25%) that I didn't include in my break even calculation because this money comes and goes from time to time according to the flows in Federal government spending. If this funding was included short rates have to rise to 4.33% (not 4.69%) before Fed starts losing money.
- There is another $1.3 trillion in funds received from the sale of currency notes, which is interest free.
- The Fed also has $247 billion on deposit from other Federal Government institutions which I have excluded because the interest on these is money that the US government pays to itself.
