The Federal Reserve Posts $150 Billion in Losses

Written with data as of March 4th, 2024.

As of the end of February, the Federal Reserve has accumulated over $154 billion in losses. In this tweet, we are going to be explaining what this means and explaining how this type of central banking loss occurs.

Remittances

The Federal Reserve Act requires the Reserve Banks to remit excess earnings to the U.S. Treasury after providing for operating costs, payments of dividends, and an amount necessary to maintain surplus. During a period when earnings are not sufficient to provide for those costs, a deferred asset is recorded.

Historical Perspective

Between 2011 and 2021, the Fed's remittances totaled over $920 billion. However, beginning in September 2022, remittances due became negative. The losses are a product of the Fed's rate increases which saw the central bank sharply increase its interest rate target while at the same time shrinking the size of its balance sheet, both of which are being done to make monetary policy tight enough to cool high levels of inflation.

Explanation for Losses

The Fed makes money by the capturing interest through the items held on its balance sheet. Additionally, the Fed obliges banks to hold a certain amount of cash in reserve with the Fed, and these reserves receive interest payments. When the Fed reduces its balance sheet, it will earn less money. If interest rates rise, the Fed will have to pay a higher interest rate on reserves held with the central bank. These two events, especially in tandem, can cause the Fed to lose money.

Going Forward

The Fed has repeatedly stressed that losing money in no way impacts its ability to operate and conduct monetary policy. In April 2023, the New York Fed estimated that the Fed will return to positive net income in 2025. Additionally, the Fed estimates that they will carry this deferred asset until mid-2027, after which it will resume transfers to the Treasury.