The Federal Reserve Bank of the United States, known as the Fed, recorded a record operating loss of $114.3 billion last year. This was the largest deficit in its history and was attributed by the U.S. newspaper “The Wall Street Journal” to its strong campaign to support the U.S. economy in 2020 and 2021, followed by the increase in interest rates to combat high inflation, among other factors.
According to the newspaper report, the United States Central Bank announced last Friday the preliminary unaudited results of its financial data for the year 2023.
According to the newspaper, these losses for the US central bank add to the large deficit of the US government budget, which requires larger auctions of Treasury Department debt. According to the US Treasury Department, in 2023, 428 public auctions were held, where negotiable securities were sold through these auctions, and $22 trillion in negotiable securities were issued.
The newspaper noted that the Federal Reserve’s losses may continue as long as short-term interest rates remain near current levels, warning of the possibility of triggering new political attacks against the Federal Reserve Bank, even though there are no signs of it so far, according to the newspaper.
The “Wall Street Journal” analyzed the reasons behind this historic loss, noting that the US central bank paid financial institutions more for interest-generating deposits and securities it had gained through purchases made when interest rates were lower. This was due to an increase in short-term interest rates reaching its highest level in two decades, over 5 percent last year.
However, the American newspaper emphasized that this type of loss does not affect the daily operations of the Federal Reserve and would not require the central bank to request a funding injection from the Treasury Department. The report explained that, unlike other federal agencies, the Federal Reserve does not need to rely on Congress to cover operational losses, adding that the Federal Reserve, in anticipation of these circumstances, has established a debt bond “IOU 2022” known as “Deferred Assets.”
The report indicates that the concept of “IOU” simply involves creating debt bonds in their public budget called deferred assets, and when the Federal Reserve achieves excess again in the coming years, it will first pay off the debt bonds before sending the surplus to the United States Department of Treasury.
The newspaper quoted Morgan Stanley’s Chief Global Economist, Seth Carpenter, as saying that this arrangement is similar to an institution facing a 100% tax rate, and offsetting current losses with future income.
And the newspaper mentioned that the Federal Reserve had always been successful in achieving profits, and it was obligated by law to send its profits, after deducting operating expenses, to the Department of the Treasury, but it added that these profits turned into losses in 2022, which meant that the federal deficit was slightly higher than it could have been.
The newspaper indicates that the losses of the Federal Reserve Bank are one of the secondary consequences of its efforts to support the economy during the COVID-19 pandemic through the purchase of large amounts of treasury bonds and mortgage-backed securities, insisting that the losses of the US central bank are due to paying more interest than it earns from those financial assets.
The “Wall Street Journal” attributes the losses of the Federal Reserve in 2022 to what it described as mysterious financial plumbing (financial reforms), explaining that before the 2008 financial crisis, the central bank maintained a relatively small portfolio, below a trillion dollars, adding that its main focus at that time was the amount of currency in circulation, and the Federal Reserve adjusted its reserves up and down if they wanted to reduce or increase short-term interest rates.
The news added that after the crisis, the Federal Reserve reduced interest rates to zero and bought large amounts of bonds to provide additional economic stimulus. These purchases flooded the banking system with reserves, and to maintain control over interest rates through a larger overall budget, the Federal Reserve reformed the way it manages interest rates. The new system, which was already being used by many other central banks, controlled short-term interest rates by paying interest on bank reserves.
The newspaper noted that over the past decade, short-term interest rates have been relatively low. This means that the Federal Reserve has earned more profits from its securities than the interest it has paid on reserves or other short-term debts. Additionally, after covering its expenses, the Federal Reserve returned approximately $107 billion to the government last year.
According to newspaper reports, James Bullard, the president of the Federal Reserve Bank of St. Louis, told journalists in 2022 that they have returned nearly one trillion dollars to the Department of the Treasury in the past ten years, and they have not kept these revenues at the Federal Reserve Bank. The American banker stressed at that time that after that, with the increase in interest rates, the situation will change.
The newspaper “The Wall Street Journal” confirmed that it is likely that the Federal Reserve will continue to incur losses as long as it keeps interest rates above 3.5 percent and reduces its portfolio of assets, a process that began in 2022. The Federal Reserve raised interest rates last year to a range that fluctuates between 5.25 percent and 5.5 percent.
