United States – The Federal Reserve announced Tuesday that a negative net income of USD 114.3bn was officially recorded in 2023. This amount, which is the largest loss recorded to date, was caused by management expenses associated with the short-term interest rate target.
Unprecedented Loss
The year just ended saw yesterday’s loss following USD 58.8 billion in net income in 2022, the Fed said. The numbers announced were audited accounts of tallies done earlier. The Fed has continuously warned that net negative income does not reduce its ability to perform its operations and policy functions, as reported by Reuters.
As per law, the Fed automatically sends any profits which are left over after operating costs are offset to the Treasury. The Fed gains from services and interest paid by the financial system and securities it holds. It has achieved quite high profits in recent years, and very low interest rates and huge volumes of bond holdings are in its states.
Financial Mechanics and Monetary Policy
The Fed´s aggressive increase in the federal funds rate late in the spring of 2022 has caused the central banks to lose control of their finances. To thwart inflation impulses, the Fed has increased the target rate from the near zero level to its current 5.25-5.5 percent range.
The central bank of the US holds to that target by paying banks, money funds, and other financial markets to park cash with the central bank, and as a result, the interest rates are paid out at higher degrees.
The total sum paid in the Fed’s 2022 interest payments for banks’ reserve balances amounted to USD 176.8 billion US dollars instead of last year’s USD 116.4 billion, while the interest sum from the reverse repo facility was USD 104.3 billion in 2022 from USD 41.9 billion in 2021.
In addition, the Fed’s income from the bonds it owns increased to USD 163.8 billion for the year ending in 2023, which is similar to that of 2022.
The Fed is granted the power to create money to finance activities that yield operating losses without restrictions on its operations from getting started. It calculates its loss in a financial usually named a deferred asset.
At the end of 2023, a deferral asset level of USD 133.3 was recorded there. On March 20th, the sum increased to USD 157.8 billion, and it is unclear how much more it will grow.
That is, when the Fed makes a profit, it will back the deferred asset with these earnings, and upon its redemption or extinction, the Fed will again begin to remit excess earnings to the Treasury, as reported by Reuters.
Long-Term Financial Outlook
FOMC officials have pointed out they have surrendered substantial money to Treasury in recent years over. In Spring 2018, a St. Louis Fed report estimated that it may take almost years for the Fed to get back to the point at which profit is again returned back to the government.