Saturday, February 20, 2010

More on Federal Reserve Interest Rates

Steven wrote: "A question I would LOVE to have answered is how the fed profits from the spread between the Fed funds rate and 3m treasuries? (Given that the Fed essentially follows the 3m treasury yield)"

Great question, Steven.

Like any for-profit institution, the Federal Reserve bows to the customer when setting prices. So you are right that the market sets the Fed interest rate, and that rate is always close to the auction rate of the 3-Month Treasury Bill. The Fed lends for a shorter term, 30 days, but also at higher risk. If you chart the two rates, the Fed rate always follows the 3-M T's lead.

And like many corporations, especially given their iron-fist monopoly on U.S. cash, the Federal Reserve tries to maximize profits by creating over-supplies of cash with sale prices, or panic shortages at premiums.

But unlike all other forms of private corporations, a central bank, by government decree, has no significant cost basis associated with their product: un-backed paper. Every penny of interest the Fed pulls in is pure profit, minus the expense of printing, which is why they outsource production and anti-counterfeiting costs to the U.S. Treasury and the U.S. Secret Service. Most people don't realize that the Secret Service primary mission is to protect the Federal Reserve system, not the President. In fact, anti-Fed Presidents, like JFK who attempted to replace FRNs with United State-issue Silver Certificates, place themselves in grave danger.

The Fed's large expenses are covered by The People. The U.S. Treasury actually pays the Fed Corporation a surcharge for the privilege of printing their private-issue cash. The tax code exempts Federal Reserve banks from contributing taxes to Americans. In fact, the IRS pays EVERY PENNY of tax income directly to the Federal Reserve as down-payment on the national debt.
"100 percent of what is collected is absorbed solely by interest on the Federal debt and by Federal Government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their Government." -J. Peter Grace, Grace Commission Report
Any check you send to the IRS is endorsed as follows:
"Pay Any F.R.B. Branch or Gen. Depository for Credit U.S. Treas. This is in Payment of U.S. Oblig." (F.R.B. is thinly veiled code for Federal Reserve Bank)
Federal Reserve profits represent a pure export of American wealth to their private holders, who are mostly foreigners. G. Edward Griffin's excellent book, The Creature From Jekyll Island (no affiliation), details who they are.

So to answer your question, like any petty counterfeiting operation, the Federal Reserve makes pure profit at any rate. But they still have to sell at or near the market rate, or they won't move cash.

However, as a socialist institution (by that I mean The People absorb their entire cost basis, but are not permitted to participate in gains) sometimes the Fed's most profitable play is to withhold cash and roll up bank assets from induced failures. In that case, like today, they will price paper cash hundreds, or even thousands of percent above the market rate. When the market rate goes negative from resulting panic, the Fed premium is technically infinite. This has the effect of isolating non-cartel banks from obtaining reserves during bank runs--instead of helping, the Fed runs on them too.

As an institution designed to loot America, whatever the Fed strategy de jour, it is ALWAYS designed to do maximum harm to Americans.


  1. Many thanks for the quick response. So it is not the spread between those two rates they profit from, but rather the interest payments received on the fed funds loans. With the 3m treasury being significant in that it instructs the Fed where they'll find buyers.

  2. "So it is not the spread between those two rates they profit from, but rather the interest payments received on the fed funds loans. With the 3m treasury being significant in that it instructs the Fed where they'll find buyers."

    Yes, that's correct. Like any bank, interest is profit.

    The 3-M Treasury auction rate is the market rate to lend to a more credit worthy institution for a little long term.

    So whether the Fed watches it (obviously they do) or they simply attempt to lend in the same market conditions, the 3-M T Bill provides a transparent rate so you always know the next macro move of the Fed.

    Ultimately, the Fed is at the mercy of the market like any other business. Even though they have a monopoly, they have very little influence over the broad market.

    If the Fed rate made any real difference, the market wouldn't halve in spite of lower Fed rates, and soon fall even lower than that with near-0%.

    Small movements of the Fed rate now, that they've decided to seize bank assets for profit, is mostly to maintain the illusion that they have influence and relevance even if its a bad influence. They are a puppet master trying to act like they control a live puppet by making motions like he's making, otherwise they risk illustrating they are nothing but a damaging parasite in all market conditions--which is the truth of the matter.

  3. Eww, eww, teacher, teacher! (raising hand and squirming in seat)

    ...what do you think of this article, should it be another required reading assignment?

  4. That is a great article, its written by Matt Taibbi, he wrote the Vampire squid one too. Best investigative journo in. MSM. He works with a lot of bloggers on story ideas, FDR you should drop him a line, he has a great platform and a talent for the invective.

  5. Isn't there an audit record of where the interest paid to the fed for fed fund loans ends up? It's paid to Fed Syndicate banks I assume - which have private shareholders?


The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

Free Hit Counter