The Federal Reserve quietly lost a fortune in 2023 as interest it pays out to banks swamped the interest it earns on its bond portfolio, data released by the central bank Friday showed.
The Fed said it lost roughly $114.3 billion in 2023, its largest-ever annual loss.
The losses occurred because the money the Fed pays banks for reserves held at the central bank exceeded the interest earned on the mortgage and Treasury bonds it holds. The Fed has been raising the interest rate paid on reserves alongside the hikes on the benchmark federal funds rate to stem the worst inflation in forty years.
The losses would be even greater if the Fed included the decline in market value of its bond holdings. But because those are held to maturity, they are not recorded as operating losses.
By law, the Fed is required to pay any profits to the Treasury Department. When it loses money, this increases the budget deficit of the federal government because the Treasury does not receive that revenue.
Because of the way the Fed accounts for the losses, the Treasury Department may be deprived of revenue from the Fed even when the central bank stops losing money. When the Fed suffers an operating loss, it creates a deferred asset in the amount of the loss. When the Fed turns a profit in the future—which will likely not happen until interest rates fall—it will first paydown the deferred assets—essentially, pay itself back for its losses—before it restarts payments to the Treasury.
The Fed turned $76 billion over to the Treasury in the first 9 months of 2022. Losses began to mount in September, totaling $16.6 billion for the year in 2022.
Never before in its history have operating losses stopped the Fed from making payments to the Treasury for a significant period of time.
So far, the Fed has wracked up around $133 billion of deferred assets that will need to be repaid before payments to the Treasury restart.
When the Fed began accumulating a huge portfolio of bonds—primarily U.S. Treasuries and mortgage-backed securities guaranteed by government agencies, including Fannie Mae and Freddie Mac—during the financial crisis, some officials worried about possible political backlash if the Fed suffered losses due to rapid rate hikes in the future. Those bond purchases, which eventually became what is known as quantitative easing or QE, continued for years after the financial crisis and were supercharged when the pandemic struck, taking the Fed’s balance sheet from around $4 trillion to $9 trillion.
Prior to the financial crisis, the Fed held only about $800,000 billion, or $0.8 trillion, in its securities portfolio.
The Fed is expected to continue to suffer losses as long as its benchmark interest rate target, now a range of 5.25 to 5.50 percent, remains above 3.5 percent.