The Fed is now holding a massive $200 billion in paper losses according to fresh data released on Thursday by the central bank.
This week, the U.S. Federal Reserve reported losses surpassing $200 billion, based on data released on Thursday.
As of Wednesday, the Fed’s earnings remittance to the Treasury Department was recorded at negative $201.2 billion.
This figure represents a paper loss, which central bank officials have indicated does not hinder their ability to implement monetary policy.
However, the number figure is still quite startling.
The negative amount is classified as a ‘deferred asset’ in the Fed’s accounting.
The central bank needs to address this shortfall before it can start returning excess earnings to the Treasury, reports Yahoo Finance.
These losses are primarily a result of the Fed’s high-interest rate policies aimed at reducing inflation.
The Fed compensates banks and money market funds for holding cash at the central bank to maintain desired short-term interest rates.
Two years ago, the Fed began experiencing losses, and in 2023, it has faced unprecedented deficits as the payouts for managing rates have exceeded the income generated from the interest on its bond holdings.
The Fed generates revenue through services provided to the banking system and from interest on its bond portfolio.
By law, it is required to return any profits to the Treasury.
For many years, the central bank has remitted significant amounts; research from the St. Louis Fed indicates that nearly $1 trillion was returned to the Treasury between 2011 and 2021.
The current loss situation is linked to an aggressive rate hike cycle that occurred from March 2022 to July 2023, during which the central bank raised its interest rate target from near-zero to between 5.25% and 5.5%.
In March, the Fed reported a paper loss of $114.3 billion for the previous year.
It paid out $176.8 billion to banks and $104.3 billion through its reverse repo facility, while earning $163.8 billion from interest on its bond holdings.
With the recent half-percentage point rate cut and the potential for further easing, the Fed is expected to experience a slower rate of loss moving forward, as it will incur lower interest expenses to maintain its target rates.
However, before it can return cash to the Treasury, it must first address the deferred asset, a process that could take years to tackle.
Yahoo Finance reports that so far, the Fed has not faced significant political scrutiny over its financial situation, which has surprised some observers, including former central bankers.
But doesn’t seem to be the case all over social media.
Americans are indeed scrutinizing the Fed for its poor financial decisions and management of the U.S. economy.
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