Now that’s a $30 billion dollar question, at least for the year 2005!
First, you should know that the Federal Reserve System was created by Congress to be self-financed and therefore is not subject to the congressional budgetary process. In this way, the Fed is considered to be “independent within government.”
Second, the quick answer to your question about how the Fed is funded can be found on the Board of Governors of the Federal Reserve System’s website:
The Federal Reserve’s income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions (the rate on which is the so-called discount rate). After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury.
For a short description of the Federal Reserve System’s annual revenues and expenditures, you should check out the Board’s annual press release, usually released in January. It provides a brief description of the prior year’s Reserve Bank income and expense data and transfers to the Treasury. The press release of January 10, 2006, providing information for 2005 is shown below:
Press Release: January 10, 2006
Federal Reserve System income is derived primarily from interest earned on U.S. government securities that the Federal Reserve has acquired through open market operations. This income amounted to $28.959 billion in 2005. Additionally, income from fees for the provision of priced services to depository institutions totaled $901 million. The remaining income of $386 million includes earnings on foreign currencies, earnings from loans, and other income.
The operating expenses of the twelve Reserve Banks totaled $2.193 billion in 2005, including the System’s net pension credit. In addition, the cost of earnings credits granted to depository institutions amounted to $212 million. Assessments against Reserve Banks for Board expenditures totaled $266 million and the cost of currency amounted to $477 million.
Net deductions to income amounted to $3.577 billion, primarily representing unrealized losses on assets denominated in foreign currencies that are revalued to reflect current market exchange rates.
Total net income for the Federal Reserve Banks in 2005 amounted to $23.521 billion. Under the Board’s policy, each Reserve Bank’s net income after the statutory dividends of $781 million to member banks and the $1.286 billion necessary to equate surplus to paid-in capital is transferred to the U.S. Treasury.
Here’s a chart to give you a visual representation of the information in the press release:
For additional information on the balance sheet of the Federal Reserve System and the Federal Reserve Banks, be sure to visit the website for the weekly Federal Reserve Statistical Release H.4.1, Factors Affecting Reserve Balances. Table 2, Consolidated Statement of Condition of All Federal Reserve Banks, shows the Fed’s assets ($854.9 billion as of May 31, 2006) and liabilities, including the amount that banks and thrifts hold on deposit at the Federal Reserve Banks ($23.4 billion). The largest single category of assets on the Fed’s books are U.S. Treasury securities held outright ($762.4 billion). The largest single liability category is Federal Reserve notes (currency) ($762.0 billion).
References
Annual Report. (2006) Board of Governors of the Federal Reserve System. Washington D.C., June 2006.
Purposes & Functions. (2005) Board of Governors of the Federal Reserve System. Washington, D.C., June 2005.
FAQs
The Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations.
Where does the Federal Reserve get its money from? ›
The Federal Reserve is not funded by congressional appropriations. Its operations are financed primarily from the interest earned on the securities it owns—securities acquired in the course of the Federal Reserve's open market operations.
Who runs the San Francisco Federal Reserve? ›
Mary C.
Daly took office on October 1, 2018, as president and chief executive officer of the 12th District, Federal Reserve Bank of San Francisco.
What is the largest source of income for the Federal Reserve system? ›
Which of the following is the largest source of income to the Federal Reserve System (Fed)? The interest earned on the US Treasury securities and held at the Fed.
How does the Federal Reserve supply money? ›
The Fed controls the supply of money by increas- ing or decreasing the monetary base. The monetary base is related to the size of the Fed's balance sheet; specifically, it is currency in circulation plus the deposit balances that depository institutions hold with the Federal Reserve.
Where does reserve money come from? ›
Federal Reserve System income is derived primarily from interest earned on U.S. government securities that the Federal Reserve has acquired through open market operations.
Which banks own the Federal Reserve? ›
The Federal Reserve System is not "owned" by anyone. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to the Congress.
What president sold the Federal Reserve? ›
It took many months and nearly straight party-line voting, but on December 23, 1913, the Senate passed and President Woodrow Wilson signed the Federal Reserve Act.
Who are the private owners of the Federal Reserve? ›
According to the board of governors of the Federal Reserve, "It is not 'owned' by anyone and is 'not a private, profit-making institution'.
Who is the Fed leader in San Francisco? ›
Mary C. Daly is president and chief executive officer of the Federal Reserve Bank of San Francisco.
Most Fed employees, who are paid by the central bank, are entitled to a wide range of benefits similar to those in the private sector.
What is the #1 source of revenue for the federal government? ›
Federal Budget. What are the sources of revenue for the federal government? Over half of federal revenue comes from individual income taxes, 9 percent from corporate income taxes, and another 30 percent from payroll taxes that fund social insurance programs (figure 1). The rest comes from a mix of sources.
Do taxes go to the Federal Reserve? ›
Myth No.
Instead of taxes, the Fed instead draws its income primarily from the interest it receives on government securities and Treasuries that it purchases through those open-market operations.
Where does the Federal Reserve get its money? ›
The Federal Reserve is not funded by congressional appropriations. Its operations are financed primarily from the interest earned on the securities it owns—securities acquired in the course of the Federal Reserve's open market operations.
Who controls the Fed? ›
The Board of Governors--located in Washington, D.C.--is the governing body of the Federal Reserve System. It is run by seven members, or "governors," who are nominated by the President of the United States and confirmed in their positions by the U.S. Senate.
Can the Fed take money out of circulation? ›
The interest rate used for ON RRPs helps the Fed set the lower rate (the floor) of its fed funds target range. These reverse repos subtract money from reserves, in essence taking money out of circulation.
Where does most federal money come from? ›
Federal Revenue Trends Over Time
The majority of federal revenue comes from individual and corporate income taxes as well as social insurance taxes (such as the Social Security taxes described above).
Who controls the money in the Federal Reserve? ›
Board of Governors of the Federal Reserve System
The Board of Governors--located in Washington, D.C.--is the governing body of the Federal Reserve System.
Who are the shareholders of the Federal Reserve? ›
Federal Reserve Banks' stock is owned by banks, never by individuals. Federal law requires national banks to be members of the Federal Reserve System and to own a specified amount of the stock of the Reserve Bank in the Federal Reserve district where they are located.
