Business
Published January 12, 2024, 7:32 p.m. ET
Rising revenue spending pushed the Federal Reserve system deep into a record loss last year, the central bank said in preliminary figures released Friday.
The Fed's revenue after expenses was negative $114.3 billion last year, compared to positive revenue of $58.8 billion the year before. The loss came amid a rise in interest expenses that the central bank faced amid a campaign of interest rate hikes to cool inflation.
The Fed paid a mix of financial institutions $281.1 billion last year, up from $102.4 billion in 2022. Meanwhile, the interest it received from central bank bonds totaled 163 last year .8 billion, up from $170 billion in 2022.
The Fed said operating costs of the 12 regional banks, which are quasi-private institutions overseen by the Fed's Board of Governors, were $5.5 billion in 2023.
The Fed pays banks, financial companies and other eligible asset managers interest to park cash on the central bank's books as part of its monetary policy and control of short-term interest rates.
Aggressive Fed rate hikes that began in spring 2022, when the central bank's interest rate target was near zero, caused that interest rate range to rise to 5.25% to 5.5% as of the December Federal Open Market Committee meeting, with the collective effect of These actions ended the Fed's streak of strong profits.
The Fed's operating loss was tied to a rise in interest expenses the central bank faced amid a campaign of interest rate hikes to cool inflation. AFP via Getty Images
The Fed is financed through interest it receives on the securities it holds and through services it provides to banks. Typically, it is profitable and returns excess revenue to the Treasury as required by law. When it loses money, it records a so-called deferred asset, which represents the loss that the Fed is expected to cover over time before returning the profits to the Treasury.
At the end of last year, deferred assets were $133 billion and as of January 10, they were $136.9 billion. Predicting the size of the loss is challenging because it depends on what the Fed does with interest rates and how much it reduces its holdings of bonds that it currently uses to earn interest.
Chairman Jerome Powell's Fed raised interest rates from near zero to 5.25% and 5.5% starting in spring 2022. Portal
The Fed is almost certainly done raising rates based on officials' comments, and if markets are right, the central bank could cut them by spring. In the meantime, the end of the balance sheet shrinkage may also be nearing.
That could ultimately limit losses, which some analysts had until recently estimated at $150 billion to $200 billion. Meanwhile, a recent study by the St. Louis Fed found that it would likely take the Fed about four years to recover its loss and begin returning money to the Treasury.
Monetary losses do not affect the Fed's ability to conduct monetary policy, officials have repeatedly stressed. At the same time, the Fed has yet to face any real political pushback over the losses.
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