Federal Reserve’s mounting losses mean less money to plug the U.S. government budget deficit.
The Federal Reserve and its monetary policymaking counterparts worldwide have recorded enormous losses as they raised interest rates to combat inflation. Despite the sizable hemorrhaging showing up on the books, central bank chiefs have said that they do not believe that it will alter how they conduct monetary policy.
The U.S. central bank is funded from the interest earned on its securities holdings, purchased from its open market operations to influence interest rates in the debt market.
Excess earnings are transferred to the Treasury Department—these are known as remittances. Between January 2011 and September 2022, the Fed sent Washington about $1 trillion in cumulative remittances. This helped the federal government pay some of its bills and plug a small portion of the gaping budget deficit.
For 19 months, the Fed has been deep in the red, accumulating about $1 trillion in unrealized losses. The Fed has suffered exceptional operating declines because it pays interest to banks to the tune of 5.5 percent, meaning that the interest expense exceeds the interest income. When interest rates were near zero, these costs were minimal.
This also means that the Treasury is no longer receiving free money, with H.4.1 data showing that the central bank totaled $151 billion in negative remittances for the week ending Feb. 21. As a result, the revenue stream for the Federal Reserve is erased, which exacerbates the federal debt and deficits.
Research from St. Louis Fed Bank economists suggests that it could take close to four years for the central bank to recoup income losses and send profits to the Treasury again.
According to the New York Fed, the institution could begin sending profits to the Treasury as early as next year.
Until then, the Fed will avoid a fiscal catastrophe and avert panic on Wall Street because monetary authorities redefine negative liabilities as deferred assets.
“Once the Fed returns to earning a positive net income, it will pay down the value of the deferred asset until it reaches zero, at which point the Fed will resume sending remittances to the Treasury,” the regional central bank staff wrote.
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