Congress, in need of revenue to help offset new spending, is raiding the Federal Reserve‘s piggy bank.
The maneuver was tucked inside the sprawling budget deal that lawmakers passed early Friday morning, hours after the government’s funding authority ran out. It lowers the limits on so-called “surplus funding” at the Federal Reserve to $7.5 billion from $10 billion, one small way to offset the estimated $320 billion increase in federal spending.
The move came during an already tumultuous week for the Fed. New Chairman Jerome Powell was sworn in Monday morning, taking over from Janet Yellen in the midst of a newly volatile stock market and concerns about rising interest rates.
This is not the first time that Congress has turned to the central bank for revenue. In 2015, lawmakers took $29.3 billion from the Fed’s surplus account – and capped it going forward – to help pay for a sweeping $305 billion infrastructure package. Under the new provision in the budget deal, the benefit to the bottom line is much smaller. The Congressional Budget Office estimates it will only raise $1.7 billion over the next decade.
Analysts deride the move as little more than an accounting gimmick. The Fed already returns the interest earned on its portfolio of holdings to the Treasury Department. That payment was worth $80 billion last year alone. The Fed’s surplus account provides a capital buffer in years when the central bank suffers losses, but ultimately, the money belongs to Uncle Sam anyway.
“Legislators who care about the integrity of the budgeting process should not support this budgetary sleight-of-hand,” former Fed Chairman Ben Bernanke wrote in a 2015 blog post.
The move two years ago also created a dangerous precedent, said Sarah Binder, a senior fellow at the Brookings Institution who studies the relationship between Congress and the central bank. That Congress would return to the trough for the new budget deal underscores the Fed’s political vulnerability.
“Congress treating the Fed like a cash cow is Exhibit A in the myth of Fed independence. A decade of criticism from the Hill has weakened the Fed’s political standing – making it easy prey for politicians who want to claim they’ve paid for new spending,” Binder said. “If the Fed’s public standing were stronger, lawmakers might have second thoughts about raiding the Fed’s rainy day funds.”
