Fed records largest loss in history

US Federal Reserve Bank makes record loss
  • Jonathan Rowe
  • 27.02.2024

In 2023, the US Federal Reserve (Fed) recorded the largest operating loss in its 110-year history and therefore paid almost nothing to the Treasury, as it should when it makes a profit.

The operating loss was $114.3 billion in 2023, according to a preliminary estimate of the central bank's 2023 financial statements released Wednesday.

In 2022, it posted a profit of 58.8 billion.

That loss is partly due to the interest rate hikes the Fed has resorted to in an effort to curb high inflation. This has forced it to pay higher interest rates on bank reserves, Treasury bills and mortgage-backed securities it holds.

In 2023, the Fed had to pay 281.1 billion in interest, up 178.7 billion from the previous year.

In addition, one of its revenue sources - interest earned on the bonds and securities it holds - was cut last year. Indeed, the Fed, having made massive purchases during the Covida crisis to support the economy, is now shrinking its balance sheet.

As its portfolio yields have deteriorated, it will receive just $163.8 billion in interest in 2023, $6.2 billion less than the previous year.

Normally, the Fed pays the Treasury all of its profits each week, less, among other things, the operating expenses of its Washington headquarters and dividends paid to the twelve regional banks that make up the Federal Reserve.

But when profits are insufficient to cover these expenses, the Fed must pay the Treasury: in this case, a deferred asset is created.

The Fed won't start paying money to the Treasury until it has profits that allow it to pay off the amount in its account.

In 2023, it was only able to send $670 million to the Treasury and its deferred assets totaled $116.4 billion. That's in addition to $16.6 billion for 2022. It totaled $133 billion.

This Fed loss has several implications. First, it reduces Treasury revenues, which could increase the budget deficit. Second, it could lead to a decline in the Fed's credibility, as its ability to fulfill its function of ensuring the stability of the financial system could be called into question.

Ultimately, the implications of this loss for the Fed and the US economy will depend on how long high inflation continues and how the Fed responds to it. If inflation declines, the Fed will be able to gradually reduce its holdings and earn a profit sufficient to pay down its deferred assets. However, if inflation remains high, the Fed may face more serious problems.

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