The Federal Reserve quietly incurred huge losses in 2023 as the interest it pays banks dwarfs the interest it earns from its bond portfolio, according to data released by the central bank on Friday.
The Federal Reserve announced that it will lose about $114.3 billion in 2023, its largest annual loss ever.
The losses occurred because the amount the Fed pays banks for reserves exceeds the interest it earns on the mortgages and government bonds it holds. In an effort to stem the worst inflation in 40 years, the Fed is raising the benchmark federal funds rate while also increasing the interest rate paid on reserves.
Losses would be even larger if the decline in the market value of the Fed's bonds is included. However, since they are held until maturity, they are not recorded as an operating loss.
By law, the Fed is required to pay profits to the Treasury. When the federal government incurs a loss, the Treasury Department does not receive that revenue, which increases the federal budget deficit.
Because of the way the Fed records losses, the Treasury could be deprived of revenue from the Fed even if the central bank stops losses. If the Fed incurs an operating loss, deferred assets will be generated in proportion to the amount of the loss. If the Fed makes a profit in the future (which is unlikely to happen until interest rates fall), it will first pay off the deferred assets (essentially paying itself back the losses) before resuming payments to the Treasury. ).
The Fed handed over $76 billion to the Treasury in the first nine months of 2022. Losses started mounting in September, bringing the total for 2022 to $16.6 billion.
Never before in the Fed's history have operating losses prevented the Fed from making payments to the Treasury for an extended period of time.
The Fed has so far accumulated about $133 billion in deferred assets that must be repaid before it can resume payments to the Treasury.
When the Fed began amassing a huge bond portfolio (primarily U.S. Treasuries and mortgage-backed securities backed by government agencies like Fannie Mae and Freddie Mac) during the financial crisis, some officials believed that the Fed was They were concerned about the potential for political backlash if they suffered losses. Rapid interest rate hikes in the future. These bond purchases eventually became known as quantitative easing, or QE, and continued for years after the financial crisis and were significantly increased during the pandemic, pushing the Fed's balance sheet from about $4 trillion to $9 trillion. increased to $.
Before the financial crisis, the Fed only had about $800 trillion, or $0.8 trillion, in its securities portfolio.
The Fed is expected to continue incurring losses as long as its benchmark interest rate target, currently set in the range of 5.25% to 5.50%, remains above 3.5%.
