Goals and constraints of the Federal Reserve System: A study of its ‘profits’ policy

This paper models the Federal Reserve’s pursuit of goals within the constraining forces of Congress, the President, financial firms and the public. Two hypotheses are empirically examined. Hypothesis 1 is that the federal budget deficit is a determinant of Federal Reserve ‘profits,’ or U.S. Treasury deposits from the Federal Reserve. Hypothesis 2 is that government spending is significantly influenced by U.S. Treasury deposits from the Federal Reserve. Empirical support of these hypotheses suggests that the Federal Reserve is partially responsible for changes in the federal budget deficit and government spending.