Fed to bond bears: we made $98.7 billion in 2014. How was your year? http://t.co/8xV506VDNf
— Brian Romanchuk (@RomanchukBrian) January 10, 2015
(I find this outcome as being somewhat entertaining, as my "tweet" above suggests. I was at a conference in the early days of the programme, and I got stuck in a conversation with an earnest analyst who explained how worried the Fed was about getting stuck with losses on their portfolio. I told him that the Fed was arb-ing the market and would make out like bandits, but he refused to believe that I knew what I was talking about.)
These Fed profits represent roughly 0.6% of GDP. If the Fed had kept its portfolio at a reasonable size, invested in Treasury Bills, and paid interest on reserves, the profits would have been pretty close to zero. Fixed income trading profits are close to a zero sum game; this means that this policy has lowered "private sector" (if you want to include foreign central banks as part of the "private sector") income by 0.6%.
To what extent QE lowered interest rates, "private sector" interest income from the Treasury was lowered further. (There would have been a reduction of interest costs for other borrowers, but that nets out with the reduction of interest income that would have been received.) Since I do not think QE lowered interest rates by much, I do not think this effect was that large.
The supposed benefit for the economy is that lower interest rates are supposed to stimulate activity. For example, it may encourage businesses to borrow, or probably more importantly, encourage households to borrow in the mortgage market. Although I see that this effect can help, it is somewhat conditional on the state of the economy. With the U.S. housing bubble now burst, I see much less of an economic boost from lower interest rates. But even so, it is hard to see the benefits from this "channel" being much larger than 0.6% of GDP, given that the reduction in long-term rates was probably less than 100 basis points.
Profitability Does Not Matter, But...
It makes little sense to worry about "profitability" as a concept when discussing the Federal Government; it creates money at almost no real cost (other than printing and minting costs, but most government money take the form of electronic book entries). What matters for the government are real resources.
However, it is necessary for the Fed to control its expenditures for reasons of political accountability. It cannot have employees running around buying things at random on the theory that "money is free for the Federal Reserve". Correspondingly, costs have to be controlled, and it is reasonable to expect the system to run with a slight profit (assuming that it does not extend duration, which is what it has done during this QE episode).
(c) Brian Romanchuk 2015