The Fed's losses this week surpassed the $200 billion mark, according to data released by the Federal Reserve on Thursday.
The Fed reported that the level of so-called earnings it remitted to the Treasury was negative $201.2 billion as of Wednesday. The figure represents a paper loss that Fed officials have said will not hurt their ability to conduct monetary policy.
The negative number is reflected in an accounting measure the Fed calls deferred assets, a shortfall the central bank must make up before it can start returning excess earnings to the U.S. Treasury.
The Fed’s losses stem from its high-interest rate monetary policy path to reduce inflation. The Fed pays banks and money funds that park their cash with the central bank to keep short-term interest rates at desired levels.
The Fed fell into losses two years ago and faces record deficits in 2023 as it has to pay out more to manage interest rates than it earns in interest on the bonds it holds.
The Fed funds itself through services it provides to the banking system and through interest on bonds it owns. It is required by law to return all profits to the Treasury, and it has returned significant amounts over the years. Research from the St. Louis Fed says the Fed returned nearly $1 trillion to the Treasury between 2011 and 2021.
This loss-making situation is associated with an aggressive rate-hike cycle from March 2022 to July 2023, when the Fed's interest rate target surges from near zero to between 5.25% and 5.5%.
The Fed said in March that its paper losses totaled $114.3 billion last year. It paid $176.8 billion to banks and $104.3 billion through its reverse repo facility, while earning $163.8 billion from interest on bonds on its balance sheet.
With the Fed's recent 50 basis point rate cut and the prospect of further easing, the pace of future loss growth is likely to slow as the level of interest payments required to maintain the rate target will be lower. However, before the Fed returns the cash to the Treasury, it must effectively repay the deferred assets, which could take years.
The Fed’s finances have so far faced no political pressure, surprising some, including former senior Fed officials.
Chicago Fed President Goolsbee reiterated on Thursday that interest rates need to be lowered "substantially" next year.
Goolsbee highlighted how the Fed's narrow focus on inflation extends to the job market, adding that he wants to prevent the unemployment rate, currently at 4.2%, from rising further. "Inflation is coming down, close to target, unemployment is up, the job market is basically where we want it to be," Goolsbee said Thursday in an interview with Chicago public radio station WBEZ. "Rates need to come down significantly over the next 12 months."
Fed watchers will now turn their attention to policymakers’ November meeting. While projections released last month suggest officials may opt for modest quarter-point rate cuts at their final two meetings of the year, the size of the cuts will depend on how the economy develops.
The article is forwarded from: Jinshi Data
