The Federal Reserve has disclosed that its losses have surpassed the $200 billion mark. As of the latest reporting, the Fed has recorded a negative return of $201.2 billion, highlighting its financial condition. Officials emphasize that these are accounting losses, which will not impact the central bank's ability to implement monetary policies.
These losses have been documented under an accounting item termed "deferred assets." Before the Fed can resume remitting excess earnings to the Treasury, it needs to balance this account. The central bank has been running at a loss for two consecutive years, with unprecedented deficits reported in 2023. The high inflation-driven interest rate policies are the primary cause behind these losses.
To maintain short-term interest rates at target levels, the Fed compensates banks and money funds for deposits held at the central bank. This cost of rate management has outpaced interest income from its bond holdings. The Fed's revenue sources include services provided to banks and bond interest, with legal requirements to remit any profits to the Treasury. Between 2011 and 2021, nearly $1 trillion was remitted.
The current financial strain is linked to a series of interest rate hikes from March 2022 to July 2023, raising the bank's rate target from near-zero to a range of 5.25% to 5.5%. In March, the Fed revealed a previous year's paper loss of $114.3 billion, with $176.8 billion paid to banks, $104.3 billion through reverse repo tools, and $163.8 billion earned from bond interest.
With a recent half-percentage point rate cut and potential further policy easing, the Fed's loss growth is expected to decelerate, as interest expenses required to maintain rate targets are projected to decrease. However, before redistributing funds to the Treasury, the Fed must offset the deferred assets, which may take several years.
