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Federal Reserve Records Largest Operating Loss Ever, Halts Payments to US Treasury

Federal Reserve Records Largest Operating Loss Ever, Halts Payments to US Treasury

Mar 26, 2024

Federal Reserve Records Largest Operating Loss Ever, Halts Payments to US Treasury

The Federal Reserve has reported an unprecedented operating loss of $114.3 billion for the year 2023, marking its largest shortfall in history. This has led the central bank to halt its customary payments to the US Treasury, as interest rates remain at elevated levels.

Reuters Graphics

The Fed's financial statement, which underwent auditing and was released on Tuesday, revealed that interest expenses, including the costs associated with the reverse repo operations, surged to a staggering $281.1 billion in 2023. This figure is nearly threefold the amount from the previous year. Conversely, the interest income on the Fed's vast portfolio of assets was $163.8 billion, exhibiting a slight decrease from approximately $170 billion in 2022.

Typically, the Federal Reserve is mandated to allocate the profits from its securities portfolio to the Treasury after covering operational costs. This revenue contribution assists in mitigating the federal budget deficit. However, when expenditures surpass income, as has been the case since late 2022, the Fed compensates by creating a deferred asset for the Treasury. This move, as reported by the central bank, has "no implications for the conduct of monetary policy." The deferred asset has ballooned by $116.7 billion in the past year, reaching a new high of $133.3 billion.

These figures largely align with the preliminary financial statements the Fed released in January of this year.

The Fed's income is primarily derived from the securities it holds in its portfolio. Additionally, it pays interest on the reserves that banks maintain at the Fed. When interest rates were near zero, this arrangement led to substantial earnings and significant payments to the Treasury. However, the dynamic shifted with the Fed's decision to initiate rate hikes in March 2022.

Subsequently, the interest payments to banks for excess reserves at the Fed escalated to a record $176.8 billion in 2023, almost tripling the amount from the previous year. As a result of these financial pressures, most regional Federal Reserve banks ceased their remittance payments to the Treasury as early as September 2022.

The Federal Reserve's financial position has undergone a dramatic change due to the rise in interest rates, leading to a historical operating loss and the suspension of payments to the Treasury.

Originally reported by Bloomberg


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