Wall Street Journal: Supporting the economy and interest rates caused $114.3 billion loss for US federal reserve

The US Federal Reserve ran an operating loss of $114.3 billion last year, the largest loss in its history, a consequence of its campaign to aggressively support the economy in 2020 and 2021, then jacking up interest rates to combat high inflation, according to the Wall Street Journal.

The newspaper said that the US central bank announced preliminary, unaudited results of its 2023 financial statements on Friday.

It said that these losses added to already large federal deficits that have required bigger auctions of Treasury debt. The central banks losses could continue for as long as short-term interest rates remain near current levels. That has the potential to fuel new political attacks on the Fed, though there have been no signs of that so far.

The newspaper explained that the central bank paid more to financial institutions on interest-bearing deposits and securities than it earned from securities that it bought when interest rates were lower. Thats a result of it raising its benchmark short-term interest rate to a two-decade high, above 5%, last year.

Nonetheless, the losses dont affect the Feds day-to-day operations and wont require the central bank to ask for an infusion from the Treasury Department. Unlike federal agencies, the Fed doesnt have to go to Congress to cover operating losses, the newspaper said, adding that the Fed created an IOU in 2022 that it calls a "deferred asset." The Fed has almost always turned a profit and is required by law to send its earnings, minus operating expenses, to the Treasury.

The newspaper added that these gains turned to losses in 2022, meaning the federal deficit has been a bit larger than it would otherwise have been.

The losses are a side effect of the Fed's efforts to support the economy during the Covid-19 pandemic by purchasing large amounts of Treasury and mortgage-backed securities. The Fed is running losses because it is paying more in interest than it earns on those securities.

The central bank maintained a relatively small portfolio until the 2007-09 financial crisis, after which its holdings of Treasurys and mortgage bonds swelled and it revamped how it manages interest rates. Before that crisis, the Feds annual transfers to the Treasury ranged between $20 billion and $30 billion, or less than 1.5% of all federal receipts.

After that, the Feds net income soared as it held short-term rates at low levels while owning higher-yielding long-term securities. Between 2012 and 2021, remittances as a share of federal receipts nearly doubled. The Fed sent more than $870 billion to the Treasury over those 10 years, including $109 billion in 2021.

The Wall Street Journal stressed that the Fed is likely to continue running accounting losses for as long as it holds interest rates above around 3.5% and shrinks its asset portfolio, a process that began in 2022. The Fed raised rates last year to a range between 5.25% and 5.5%. (QNA)