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The Federal Reserve’s (Fed) aggressive interest rate hike has it in a situation unheard of in American banking history: The central bank is consistently losing money.
In recent months the central bank’s operating losses have increased, as the interest the Fed pays commercial banks to keep money out of circulation now exceeds the income it receives from Treasury securities and mortgage-backed securities, valued at $8.3 trillion.
Despite the Fed’s losses, bankers do not anticipate that the deficit will affect the central bank’s ability to make monetary policy, as it has made more than $100 billion in profits in recent years.
If the Fed’s losses continue, the central bank would not have to turn to Congress for more money, but instead would create a debt on its balance sheet called a deferred asset. As soon as the Fed returns to surplus, the central bank will prioritize paying down that debt, rather than sending the surplus to the Treasury as it has traditionally done.
The Fed’s surplus has been transferred to the Treasury, however, with the losses reported by the Central Bank, this policy will have to be reversed in the coming years.
The Fed’s portfolio consists of a series of financial assets – such as treasury bonds and mortgage-backed securities – that on an average yield the central bank a return of approximately 2.3%.
On the other hand, the Fed’s liabilities are a series of bank deposits held by the central bank, known as reserves, and a series of daily loans called reverse repurchase agreements made by commercial banks.
Prior to the 2008 crisis, the Fed maintained its relatively small portfolio of less than $1 trillion in assets. After Lehman Brothers’ collapse, the central bank lowered interest rates to near zero and began a massive purchase of financial assets to inject liquidity into a distressed market.
That policy resumed during the pandemic when the Fed pumped a historic amount of money into the market while purchasing a massive amount of public and private debt to keep the U.S. economy afloat.
After expenses were covered, returns from interest earned by the central bank exceeded $107 billion, which was transferred to the Treasury Department.
With the steep rise in interest rates, the Fed will not see any more returns, as its outflows exceed its inflows. According to economists at investment bank Barclays, the Fed could lose as much as $60 billion in 2023, and another $15 billion in 2024, before returning to surplus in 2025.
The Fed may not be able to finish paying the debts acquired by these deferred assets until 2026, which means that the Treasury Department will not be able to count on central bank transfers for quite some time.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica