The Fed loses... who wins?
An accountant's view on the Fed income statements since 2008
It may seem quite astonishing that a central bank – granted with statutory privilege to issue currency – experiences losses. But, since September 2022, the US Federal Reserve System (the Fed), the central bank of the United States, has been incurring realised losses, depleting its equity capital.
This quite uncomfortable situation is rooted in financial system disruptions which, since Summer 2007, induced the Fed to make a number of unconventional monetary policy interventions. The latter are the ultimate cause of realised losses that the Fed has been incurring, as well as of further unrealised fair value losses on its securities portfolio on hold.
Realised losses originate from operational costs, transactions with financial institutions and transactions with the US Department of the Treasury (US Treasury):
By netting all the flow transactions between the US Treasury and the Fed, our analysis shows that net flows in favour of the Fed amount so far to +458,786 mil USD between 2022 and 2024, while overall accumulated balance between the two institutions since 2008 amounts to +105,739 mil USD in favour of the Fed; this balance was -353,047 mil USD in favour of the US Treasury before that loss-making operations started in 2022.
Fed losses further originate from operational costs, which increased by +233 % to 9,894 mil USD from their initial level in 2008.
Financial institutions which either hold large deposits at or engage in reverse-repo transactions with the Fed benefit from the realised losses. The Fed did not remunerate their deposits before 2008, but sought to be authorised to do it as early as 2003. Now these operations cost interest payments respectively at the Interest-On-Reserve-Balances (IORB) and at the Over-Night-Reverse-Repurchase-Facility (ONRRP) rate. By netting all the Fed flow transactions with financial institutions, our analysis shows that net flows in favour of these institutions amount to -168,867 mil USD, -213,510 mil USD, and -48,131 mil USD respectively in 2024, 2023, and 2022. Cumulated net flows since 2008 show a negative balance in favour of financial institutions of -43,550 mil USD.
In view to put these amounts in context, they can be compared with the Medicaid budget for the fiscal year 2024 (ended on September 30) of 618 bill USD, net interest on the public debt of 949 bill USD, and the total federal budget deficit of 1.8 trill USD.
The full analysis is available here.