By Sarah J. Thompson
NEW YORK (Reuters) – The U.S. Federal Reserve disclosed this week that its losses have surpassed $200 billion, according to data released on Thursday.
As of Wednesday, the Fed reported a negative $201.2 billion in earnings remittance to the Treasury Department. While this represents a paper loss, officials at the central bank have emphasized that it does not hinder their ability to conduct monetary policy.
This negative figure is reflected in an accounting measure known as a deferred asset. The Fed must address this shortfall before it can start returning excess earnings to the Treasury.
The Fed’s losses stem from its high-interest rate monetary policy strategy aimed at curbing inflation.
To maintain short-term interest rates at desired levels, the Fed pays banks and money funds to hold cash at the central bank. However, the central bank began incurring losses two years ago, culminating in record deficits in 2023, as the expenses of managing rates exceeded the interest income from its bond holdings.
The Fed finances itself through services provided to the banking system and interest earned on its bonds. It is mandated by law to return any profits to the Treasury Department. For many years, the Fed has returned substantial amounts, with St. Louis Fed research indicating nearly $1 trillion was returned between 2011 and 2021.
The recent loss-making trend is linked to an aggressive cycle of rate hikes implemented between March 2022 and July 2023, which saw the central bank’s interest rate target surge from near zero to between 5.25% and 5.5%.
In March, the Fed revealed a paper loss of $114.3 billion for the previous year. It disbursed $176.8 billion to banks and $104.3 billion through its reverse repo facility, while earning $163.8 billion in bond interest.
With the recent half percentage point rate reduction and potential further easing, the Fed is expected to experience a slower pace of losses going forward, given the reduced interest expenses required to maintain its rate target. However, before returning funds to the Treasury, the Fed must address the deferred asset, a process that could span several years.
Despite its financial situation, the Fed has not yet faced significant political scrutiny, surprising some, including former central bankers.
(Reporting by Sarah J. Thompson; Editing by Dan Burns and Andrea Ricci)