Federal Reserve: Profits and FOMC meeting

In a not very well advertised announcement last week, the Federal Reserve turned over about $47.4 bln to the US Treasury. This was a record payment. Over the past decade, the Fed typically gives the Treasury about $25 bln of its profits. The Fed reportedly made some $53.4 bln last year, mostly from its MBS investments.

However, about 10% of the profits came from its consumer credit, commercial paper purchases and the vehicles created to absorb Bear Stearns and AIG's distressed assets. Separately, we note that GM has agreed to payback Treasury the remaining $4.7 bln under TARP. One the net consequences of this and the somewhat stronger than expected economy (increased revenues) is that the amount of Treasuries the government needs to sell is somewhat less than anticipated.

The FOMC meets this tomorrow and Wed. No one expects a change on rates, keeping the focus squarely on its assessment and guidance. The FOMC may upgrade its economic assessment. It inflation assessment is unlikely to be changed. Nearly half of the items in the core CPI basket and core PCE basket are still experiencing outright declines.

In addition, the FOMC is likely to repeat its observation of the ongoing weakness in bank credit. We expect the Fed to maintain its guidance that conditions will likely warrant low interest rates for an extended period of time. There may be some tweaking of the language surrounding the asset purchases, but it may be still a bit early to really give much consideration to asset sales. A single dissent is likely to be taken in stride by the market. More than that and there could be a sharper market reaction.