Fed losses exceed US$100 billion due to interest increases

The losses of the Federal Reserve They surpassed the $100 billion mark, central bank data released Thursday showed, and are likely to rise much further before the red numbers stop.

The US central bank continues to pay more in interest costs than it receives for the bonds it holds and the services it provides to the financial sector.

While there is considerable uncertainty about how things will play out, some observers believe the Fed’s losses, which began a year ago, could double before tapering off.

William Englisha former top central bank official now at Yale University, said he expects a loss “maximum” of around US$200 billion by 2025. Derek Tangfrom the forecasting firm L.H. Meyersaid the loss is likely to be between $150 billion and $200 billion next year.

The Federal Reserve recognizes its losses in what it calls a deferred asset, an accounting measure that counts what it will eventually have to cover in the future before it can return to its normal practice of returning its profits to the Treasury.

Losing money is a very unusual situation for the Fed.

But at the same time, the central bank has warned many times that the situation does not in any way affect its ability to conduct monetary policy and achieve its objectives.

That the Federal Reserve was losing money has not been a surprise given its aggressive campaign of interest rate hikes, which has taken the benchmark overnight rate from near zero in March 2022 to its current range of 5.25%. -5.50%.

As inflationary pressures ease, the Federal Reserve is widely expected to have ended its rate hikes, or be close to doing so.

Liquidity destruction

However, it does not mean that losses will stop increasing, as the current level of short-term rates will raise negative net income for quite some time. Losses will eventually stop mainly due to the ongoing process of Fed to reduce its balance sheet, which complements its rate increases.

The Federal Reserve it bought bonds aggressively during the coronavirus pandemic and the immediate aftermath, and in just over the last year it dumped about $1 trillion in Treasury and mortgage bonds.

The officials of the Federal Reserve They have suggested that there is still a lack on this front and, therefore, the central bank will have to spend less on interest because it is eliminating liquidity from the financial system. Financial markets anticipate a slowdown in the second or third quarter of 2024.

The liquidity targeted by the Federal Reserve It exists mainly in the form of bank reserves and inputs to the central bank’s reverse repurchase facility.

Through these tools, the Fed It pays banks, money managers and others to hold cash on its books, so that if liquidity dwindles, it costs the central bank less to tie up what’s left, even if its policy rate doesn’t change.

“The pace of losses will slow even if interest rates remain high, because reserves and (repos) are declining as securities are depleted, and new securities purchases are facing higher rates.”English said.

Weight in monetary policy

For some time, the Fed has returned substantial amounts of money to the Treasury and this money has been used to reduce government deficits.

James Bullard, former head of the St. Louis Federal Reserve, said in an interview Wednesday that he is “concerned” because of the central bank’s losses.

Bullard He said it probably would have been better for the Fed to have kept some of the trillion dollars it has received from the Treasury over the last decade to cover the kind of losses it is now experiencing, but he noted that that is not the system that Congress has established.

When the Federal Reserve stops losing money, it will be years before it can take the deferred asset off its books and start returning cash to the Treasury. In 2022, the Fed returned US$ 76,000 million, after returning US$ 109,000 million in 2021.

Source: Reuters