Federal Reserve losses surpass $100 billion, and still rising

Robert Besser
21 Sep 2023, 01:10 GMT+10

Last week, the Federal Reserve said its losses surpassed the US$100 billion mark and will likely continue to increase
The U.S. central bank continues to pay out more in interest costs than it takes in from the interest it earns on its bonds and the services it provides to the financial sector
However, some experts said Fed losses, which began a year ago, could even double before the prices reverse

WASHINGTON D.C.: Last week, the Federal Reserve said its losses surpassed the US$100 billion mark and will likely continue to increase.

The U.S. central bank continues to pay out more in interest costs than it takes in from the interest it earns on its bonds and the services it provides to the financial sector.

However, some experts said Fed losses, which began a year ago, could even double before the prices reverse.

William English, former top central bank staffer now at Yale University, said the Fed could hit a "peak" loss of around $200 billion by 2025.

Meanwhile, Derek Tang, from forecasting firm LH Meyer, said the Fed's losses could be between $150 billion and $200 billion by next year.

The Fed's aggressive campaign to raise interest rates saw it increase its benchmark overnight interest rate from the near-zero level in March 2022 to its current 5.25 percent to 5.50 percent range.

However, as inflation begins to fall, the Fed is expected to stop or reverse its rate increases.

The current level of short-term rates will continue to drive up the net negative income, but the losses will eventually end mainly due to the Fed continuing to shrink its balance sheet, which complements its rate hikes.

In an interview last week, James Bullard, former head of the St. Louis Fed, said that he is "worried" about the central bank's losses and "it would be better not to do this."

The Fed should have kept some of the $1 trillion it has given the Treasury over the last decade to cover the sort of losses it is now navigating, but that is not the system Congress has set up, he added.