By Michael S. Derby
NEW YORK (Reuters) – The U.S. Federal Reserve’s losses surpassed $200 billion this week, according to data released by the central bank on Thursday.
The Fed reported that the level of so-called profit transfers to the Treasury Department was negative $201.2 billion on Wednesday. This number represents a paper loss that central bank officials have noted does not harm their ability to conduct monetary policy.
The negative number is captured in an accounting measure the Fed calls a deferred asset. The Fed must cover this shortfall before it can return excess revenue to the Treasury.
The Fed’s losses stem from the high-interest monetary policy it has adopted to reduce inflation.
The Fed pays banks and money funds to park cash at the central bank to keep short-term interest rates at the desired level. The Fed made a loss two years ago and faces record red ink in 2023 because the money it has had to pay out to manage rates exceeds the money it makes from the interest earned on the bonds it holds .
The Fed finances itself through services it provides to the banking system and through the interest on bonds it owns. It returns any profits to the Treasury Department, as required by law, and for years the central bank has returned significant amounts: St. Louis Fed research shows that the Fed gave nearly $1 trillion to the Treasury between 2011 and 2021 of Finance has returned.
The money-losing situation is linked to an aggressive rate hike cycle between March 2022 and July 2023, which sent the central bank’s interest rate target soaring from near-zero levels to between 5.25% and 5.5%.
The Fed said in March that paper losses last year were $114.3 billion. It paid out $176.8 billion to banks and $104.3 billion through its reverse repo facility, while earning $163.8 billion through interest on bonds on its balance sheet.
With the Fed’s recent half-percentage point rate cut and the prospect of further easing, the Fed is likely to see a slower pace of losses grow as it faces lower interest charges to maintain its interest rate target. However, before the Fed can return cash to the Treasury Department, it will have to actually repay the deferred assets, which could take years.
So far, the Fed has not faced any political criticism over its financial situation, although that has surprised some, including former central bankers.
(Reporting by Michael S. Derby; Editing by Dan Burns and Andrea Ricci)
