Fed’s Paper Losses Exceed $200 Billion, Reports Reuters

By Michael S. Derby

NEW YORK – The U.S. Federal Reserve’s losses have surpassed $200 billion this week, as revealed in recent data from the central bank.

As of Wednesday, the Fed’s remittance to the Treasury Department registered at a negative $201.2 billion. This figure indicates a paper loss, which central bank officials have confirmed does not hinder their ability to implement monetary policy.

This negative balance is reflected in an accounting category known as a deferred asset, requiring the Fed to cover this shortfall before it can begin transferring excess earnings back to the Treasury.

These losses arise from the Fed’s high-interest rate policy aimed at curbing inflation. The central bank compensates banks and money funds for maintaining cash reserves, which in turn stabilizes short-term interest rates. The Fed entered a loss situation two years ago and faced unprecedented deficits in 2023, as expenses related to rate management have exceeded the interest income generated from its bond holdings.

The Fed finances itself through services rendered to the banking system and interest earned on its securities. By law, any profits are returned to the Treasury. Historically, the central bank has contributed significantly, with estimates indicating nearly $1 trillion returned between 2011 and 2021.

The current loss situation is linked to an aggressive series of interest rate hikes between March 2022 and July 2023, which raised the central bank’s target interest rate from nearly zero to a range of 5.25% to 5.5%.

In March, the Fed reported a paper loss of $114.3 billion for the previous year. During that time, it disbursed $176.8 billion to banks and $104.3 billion through its reverse repo operations, while earning $163.8 billion from interest on its bond portfolio.

With the recent half-percentage point rate cut and expectations of further easing, the Fed is likely to experience a slower accumulation of losses due to reduced interest expenses in maintaining its target rate. However, before any funds can be returned to the Treasury, the Fed must first address the deferred asset, a process that may take years.

So far, the Fed has not encountered significant political pressure regarding its financial state, which has surprised some observers, including former central bankers.