Guess Who Lost $114 Billion Last Year? It Was The Federal Reserve!

This headline caught my eye: “Federal Reserve posts largest operating loss on record.”

You read that right. The Federal Reserve System (the “Fed”) lost over $114 billion in 2023.

Most readers ask, “How can the Fed lose money; don’t they print the stuff?” Well, yes, the Fed does print money, but that misses the point.

From your perspective, the money the Fed prints is an asset; you can put it in the bank or invest in anything you want. But from the Fed’s perspective, money is a liability, actually a form of debt. It appears on the liabilities side of the Fed’s balance sheet.

Just look at a dollar bill in your purse or wallet some day and read it. It says, “Federal Reserve Note.” And a note is a form of debt. So, the Fed can’t print its way out of an operating loss.

What about assets? When the Fed prints money, they do so by buying Treasury notes or mortgages from big banks. The money comes out of thin air, but the Treasuries and mortgages are delivered to the Fed and go on the balance sheet as assets. That’s where the trouble begins.

A few years ago, the Fed loaded up on notes with interest rates around 2.0%. Many of those notes have five- or ten-year maturities and they’re still on the balance sheet. Meanwhile, the Fed pays banks interest on excess reserves deposited by the banks with the Fed. That’s an overnight rate closer to 5.0% these days.

You don’t need a Ph.D. in economics to see that if you earn 2.0% on your assets and pay 5.0% on your liabilities, you lose money. And that’s what’s happening at the Fed.

This does not happen in isolation. When the Fed makes money, they hand over the profits to the Treasury in net of operating costs. But when the Fed loses money, the Treasury has to subsidize the Fed, which comes out of taxpayer funds.

Is the Fed going broke? Actually, yes.

Not only is the Fed losing money with negative cash flow, but its capital is also evaporating. If you marked the Fed’s balance sheet to market (something the Fed does not do), it would show negative net worth from time to time.

I once had a private dinner with a Fed Governor. She told me that central banks don’t need capital. I guess we’re about to find out if that’s true or not.

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