Rising income spending pushed the Federal Reserve into a record deficit last year, the central bank said in preliminary figures released Friday.
The Fed's net income after expenses was negative $114.3 billion last year, compared to positive $58.8 billion the year before. The losses were related to the sharp increase in interest expenses faced by the central bank during its interest rate hike campaign aimed at curbing inflation.
The Fed paid out $281.1 billion to financial institutions last year ($102.4 billion in 2022). Meanwhile, interest earned on bonds held by central banks totaled $163.8 billion last year, and $170 billion in 2022.
The Federal Reserve announced that operating expenses for the 12 regional banks, quasi-private institutions overseen by the Fed's Board of Governors, will reach $5.5 billion in 2023.
As part of the way it conducts monetary policy and controls short-term interest rates, the Fed pays banks, financial companies, and other eligible asset managers interest for holding cash on the central bank's books.
The Fed's aggressive rate hikes that began in the spring of 2022, when the central bank's interest rate target was near zero, pushed its interest rate range between 5.25% and 5.5% as of December's Federal Open Market Committee meeting. It was done. These actions would end the Fed's streak of high profit margins.
The Fed raises money through the interest it earns on the securities it owns and the services it provides to banks. It usually makes a profit and returns excess profits to the Treasury as required by law. When a loss occurs, it records what's called a deferred asset that aggregates the losses, and the Fed expects to cover them over time before returning the profits to the Treasury.
Deferred assets were $133 billion at the end of last year, but as of January 10, they were $136.9 billion. It is difficult to predict how big the losses will be. That's because it depends on what the Fed does with interest rates and how much it reduces its holdings of bonds that currently earn interest.
The Fed is almost certain to finish raising rates based on what officials say, and if the market is right, it could cut rates by the spring. On the other hand, it is possible that the company is nearing the end of shrinking its balance sheet.
This could ultimately limit losses, which some analysts had until recently expected to be in the $150 billion to $200 billion range. Meanwhile, a recent study by the St. Louis Fed suggests it will likely take up to four years before the Fed can cover its losses and begin returning money to the Treasury.
Officials have repeatedly stressed that the loss of funds does not impair the Fed's ability to conduct monetary policy. At the same time, the Fed has yet to face any real political backlash over its losses.
