Here is an article written by Fed economists estimating what might happen in various rate environments/

Fed Abstract 2013-01

It all sounds so benign when you read it. Might be a little hit to the Fed's income, but no worries. You have to read between the Fed-speak lines to get the real meaning.

"The projections imply that for the next several years, the Federal Reserve's balance sheet remains large by historical standards, and earnings remain high."

Hmmmmm. Earnings are high. That is a good thing isn't it? Lets see, how did they get those earnings to be so high?. Oh yeah, they created three trillion new dollars out of nothing and loaned it to we citizens to pay for crap mortgages so the banks would not go bust and to pay for all congressional spending our legislatures can't seem to get under control.

"Using the FOMC's stated exit strategy principles and the Blue Chip financial forecasts of the federal funds rate, the projections have the Federal Reserve's portfolio beginning to contract in 2015, returning to a more normal size in 2018 or 2019, and returning to a more normal composition a year thereafter. "

Hope these projections turn out more accurate than the last six years. After all, according to the Fed the housing mortgage market was not going to be a problem. Maybe they have "better" models now.

"The projections imply that Federal Reserve remittances to the Treasury may decline for a time, and in some cases fall to zero.

The above is fedspeak for "If we start selling some of this stuff that we have been making the market on, and interest rates rise, we could loose a sh*&load of money when bond prices fall".

"To illustrate the interest rate sensitivity of the portfolio, we consider scenarios where interest rates are 100 basis points higher or lower than in the baseline."

They forgot to add that "if interest went up a few hundred basis points above baseline, "we are royally screwed. We're bankrupt!"

But wait............. the Krugman's of the world would correctly point out that the Fed can't technically become bankrupt. They have a printing press! Just print up the shortage. No problem. Like the old Jay Leno Dorito's commercials, "Go ahead! Stick your head in the bag! Crunch all you want, we'll make more!"

See, no worries.....................What could go wrong????

John