① Starting November 5, the size of the Federal Reserve's so-called "deferred assets" began to shrink, from $243.8 billion to $243.2 billion on November 26; ② High interest rates are one of the main reasons for the Federal Reserve's record losses in recent years.
The Federal Reserve appears to have finally reversed its three-year losing streak, an unprecedented loss stemming from the central bank’s aggressive interest rate hikes following the COVID-19 pandemic.
According to data recently released by the Federal Reserve, the Fed’s profitability has gradually recovered since the beginning of November and has begun to slowly make up for its accounting mechanisms used to record losses.
Starting November 5, the size of the Federal Reserve's so-called "deferred assets" began to shrink, decreasing from $243.8 billion to $243.2 billion on November 26. Although the change was small, it clearly reversed the long-term trend.
The Federal Reserve is profitable in the vast majority of cases, and the law requires it to remit its profits after deducting operating expenses to the U.S. Treasury.
The Federal Reserve's "deferred assets" accumulate losses that it must first cover before it can legally resume remitting profits to the Treasury. The Federal Reserve earns revenue through the proceeds from its bond holdings and by providing services to the financial system, with the remainder returned to the Treasury.
Observers are unsure how long it will take for the Federal Reserve to fully cover its "deferred assets" and return profits to the Treasury, but it is widely believed that it will take several years.
Former senior Federal Reserve official and lobbying group bank Bill Nelson, chief economist at the Policy Institute, said that based on tracking the financial performance of the regional Federal Reserve Banks, the Fed's "combined profit for the 12 regional Federal Reserve Banks appears poised to exceed $2 billion this quarter."
High interest rates are one of the main reasons for the Federal Reserve's record losses in recent years. As one of the ways the Federal Reserve implements monetary policy and controls short-term interest rates, it pays interest to banks , financial companies, and other qualified money managers to deposit cash into the central bank's books.
To curb inflation, starting in March 2022, the Federal Reserve raised interest rates at the fastest pace in nearly 40 years, raising the target range for the federal funds rate to 5.25% to 5.5% at one point. Due to these high interest rates, a widening gap emerged between the returns on the Fed's assets and the interest it paid to banks , resulting in losses.
With the rate cuts continuing, the Federal Reserve's losses have essentially stopped. Since September of last year, the Fed has initiated an easing cycle, and after several rate cuts, the target range for the federal funds rate is currently 3.75%-4.00%. Given policymakers' concerns about the state of the job market, further rate cuts are expected.
LHMeyer analyst Derek Tang said, "Overall, the accumulation of deferred assets appears to have stopped at the same time as the 25 basis point cut in the IORB (Interbank Reserve Rate) in October."
He added that further analysis showed that the losses stopped because the "negative interest rate differential" had ended, rather than due to the occasional high profits from seigniorage.
Deutsche Bank Matthew Luzzetti, chief economist for the U.S., said, "As market yields begin to rise above the IORB, the Fed's losses should stop and reverse."
(Article source: CLS)
