In particular, the Federal Reserve’s interest expenses will increase as short-term interest rates rise, while reserve balances initially remain sizable. In addition, policy normalization may well involve significant sales of the Federal Reserve’s agency securities holdings, and losses could be incurred in these sales.
A recent study by the Board staff considered the effect of a number of scenarios on Federal Reserve income, based on assumptions about the course of balance sheet normalization that are consistent with the exit strategy principles adopted at the June 2011 FOMC meeting.27 The projections resulting from this exercise imply that Federal Reserve remittances to the Treasury will likely decline for a time.