Since I left my career on Wall Street, I’ve written extensively about how Wall Street’s collusion with the Federal Reserve led to some of the biggest financial distortions we’ve ever seen.

But from some questions I’ve been receiving in the mailbag, I feel there’s some confusion out there about how that really works.

So, today I want to pull back the curtain on one of the important aspects of the Fed to better illustrate this.

The Fed Is a Non-Profit, But…

Here’s one interesting factoid you may not be aware of…

The Fed is generally perceived as a non-profit institution. That’s what the talking heads at the Fed claim too.

But if you’ve been following my work, you’re probably aware that the first rule about the Fed is to watch what it does, not what it says.

Now, it’s true that the Fed returns any excess profits it earns from holding securities back to the U.S. Treasury. For instance, the central bank transferred back $109 billion for 2021. Yes, that is billion with a b.

But, as always, the truth is a little more complex than that.

You see, the Fed sends earnings to the Treasury only after backing out expenses, and dividends (among other things).

Here’s the thing though. In reality, the Fed determines its own expenses. There is nothing in the legislation that requires the Fed to return this or that amount as opposed to using some of it for its own purposes.

But wait… let’s back up a second… Dividends? What kind of non-profit pays a dividend?

Well, the U.S. central bank does. It pays a 6% risk-free dividend on stock that its member banks must purchase in order to participate in the Federal Reserve System. 

Now, it’s not your regular kind of stock. It may not be sold, traded, or pledged as collateral for a loan.

More to the point, though, there are very few places where ordinary Americans can park their cash for such a hefty rate of return. Never mind doing that risk free.

The Fed Dividend

In 2021, the Fed gave away $583 million in dividends to banks. In 2020 and 2019, it paid out $386 million and $714 million in dividends, respectively.

And while these giveaways to banks may look small in relative terms, the Fed has been doing this for more than a century now.

That’s right. This rate was originally set at 6% when the Fed was created and has never been changed since.

So, the “Fed dividend” adds up.

And it’s been a great deal for the banks historically.

In fact, only between 1970 and 1997 were banks largely worse-off holding capital in the Fed versus buying an alternative risk-free asset like Treasuries.

Put another way, banks received a lower return with Fed shares one-fourth of the time and a higher return three-fourths of the time than they otherwise would have with Treasury notes.

You can see that in the chart below. I green-bolded the time periods when Treasuries yielded lower returns than the Fed dividend.


The Fed dividend was enacted in 1913. Since then, 10-year U.S. Treasuries returned roughly 4%.

The 2% difference may not seem like much, but, again, it adds up.

The upshot is that shareholder banks collect a dividend, which generates a handsome and steady profit for them over time.

The Strange Animal That the Fed Is

The Fed dividend is one of the many lesser-known ways the U.S. central bank showers Wall Street with its blessings, asking for nothing in return.

It’s also yet another example of the strange way in which the Fed is both a public and private entity.

Now, I’ve written a great deal about this in these pages and elsewhere, but just to recap…

On the one hand, you have The Federal Reserve Board of Governors – the main policymaking body – that’s appointed by the President and confirmed by the Senate.

That’s the Fed’s public side.

But on the other hand, you have 12 regional Federal Reserve Banks. It’s the presidents of these banks who participate in the committee that sets monetary policy. These institutions operate as private corporations.

And here’s the best part… they are owned by member banks in their districts, which they are also responsible for regulating.

Bottom Line

This is another sign of The Great Distortion I’ve been telling you about between the financial elite and ordinary Americans.

The money keeps flowing to the top, while everyone else gets screwed over.

The Fed dividend is basically a risk-free entitlement program for the banks, which has been running in obscurity for over 100 years.

Just think about it…

Are you aware of any other industries where the businesses own stock in the agency that regulates them – and receive a dividend payout from that agency?

The answer is no.

Speaking of the Fed dividend… it was originally meant to incentivize banks into joining the Federal Reserve system.

That said, there’s zero reason to try and entice that membership today.

And here’s the kicker… Most member banks don’t even have to pay corporate taxes on the dividends. That’s in stark contrast to most Americans who pay anywhere from 15-20% in dividend taxes.

As the late George Carlin once said, “It’s a big club and you ain’t in it!”

That pretty much hits the nail on the head.



Nomi Prins
Editor, Inside Wall Street with Nomi Prins