Has the Federal Reserve Become Congress's Golden Goose?

Samuel Rines

Economics, Americas

For lawmakers searching for money to spend, the Fed’s easy money may be too tempting.

Ever so quietly, the U.S. government has discovered an excellent new funding source for its projects—the U.S. Federal Reserve.

A new transportation bill, the “Fixing America’s Surface Transportation Act,” passed in late 2015, draws against the surplus account at the Federal Reserve to fund road and highway construction and repairs. On the surface, this might appear to be an innocuous, even laudable, use of the Fed’s surplus, which has swelled as a (positive) side effect of quantitative easing.

In fact, there are a couple of reasons Congress’s incursion to the Fed’s balance sheet is, at the very least, disconcerting. First, it may set a precedent for future forays into what could arguably be considered the Fed’s own capital cushion. And second, it begins to erode the barrier between fiscal and monetary policy, a barrier that is critical to the proper execution of monetary policy.

Already, the Fed remits its operating surplus to the U.S. Treasury, and, due to the Fed’s expansion of its balance sheet, this has become a consequential sum, far more than the Fed has remitted in the past.

Oddly though, it was not this revenue stream that Congress decided to divert. Instead, the decision was made to draw from a sort of rainy day fund—the account also used to pay dividends to Federal Reserve shareholders (member banks). Banks joining the Fed system are required to pay into the system, and they receive dividends from the surplus account on their ownership stakes in the Federal Reserve. Typically, this figure was fixed at 6 percent, but for larger banks, this figure is now pegged per Congressional decree to no more than the yield of the U.S. ten-year Treasury note. It is this surplus account that Congress used to fund its transportation bill.

When monetary policy directly finances fiscal policy, it is what is commonly known as “helicopter money.” Granted the amount—around $26 billion—is fairly inconsequential this time. But for a Congress searching for money to spend, the Fed’s easy money may be too tempting.

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