The US Federal Reserve has reached a milestone, albeit an unwanted one, with its losses surpassing $200 billion. According to the central bank’s latest data, its so-called “earnings remittance” to the Treasury Department stood at a negative $201.2 billion as of Wednesday. While this figure may seem alarming, Fed officials have reassured that it does not hinder their ability to implement monetary policy.
The losses are largely attributed to the Fed’s high-interest rate strategy aimed at curbing inflation. To maintain short-term interest rates, the Fed pays banks and money funds to hold cash, resulting in significant outlays. Meanwhile, the interest earned from its bond holdings has been insufficient to cover these expenses, leading to a shortfall.
This marks a significant departure from the Fed’s historical practice of generating substantial profits, which it returns to the Treasury Department as required by law. Between 2011 and 2021, the Fed handed over nearly $1 trillion to the Treasury. However, the aggressive rate hikes between March 2022 and July 2023, which saw interest rates soar from near zero to between 5.25% and 5.5%, have reversed this trend.
The Fed’s financial situation is closely tied to its interest rate policy. With the recent half-percentage point rate cut and potential future easing, the pace of losses is expected to slow. However, before the Fed can resume returning cash to the Treasury, it must first cover its deferred asset, a process that may take years.
Despite the significant losses, the Fed has not faced significant political backlash, a situation that has surprised some former central bankers.
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