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A new study from the Federal Reserve Bank of St. Louis suggests that the Federal Reserve might require nearly four additional years to recover from a significant operating loss and resume contributing profits to the U.S. Treasury. This loss stems from the Fed’s strategy of raising interest rates and simultaneously reducing the size of its balance sheet as part of efforts to tighten monetary policy and curb rising inflation levels.
The dual impact of these policy measures led the Federal Reserve to start experiencing financial losses in September 2022. The central bank uses an accounting measure known as a deferred asset to capture the net negative income situation, with the current amount standing at $120.4 billion as of November 22.
According to the St. Louis Fed’s research, the timeline for covering the deferred asset and resuming excess earnings to the Treasury is estimated to extend until mid-2027.
The Federal Reserve’s financial losses are unprecedented in its history, fueled by a combination of increased interest rates and a reduction in income from Treasury and mortgage bonds. Despite the losses, the Fed emphasizes that its ability to operate and conduct monetary policy remains unaffected.
Historically, the Federal Reserve has been a consistent profit generator, returning nearly $1 trillion to the government over the past decade. However, the landscape changed in the fall of 2022 as the federal funds rate surpassed the income derived from bonds and services, leading to financial losses.
The uncertainty surrounding the monetary policy outlook complicates predictions about the ultimate size of the loss, its peak, and the timeline for the Federal Reserve to cover the deferred asset and resume contributing to the Treasury. Some private sector analysts anticipate the net loss peaking between $150 billion and $200 billion, possibly by 2025.
Joseph Wang, Chief Investment Officer at Monetary Macro, suggests that recent market events may influence the Fed’s financial projections, potentially extending the period of negative income until 2028.
