Unexpected: Fed Loses Over $204 Billion
The Federal Reserve has once again released its balance sheet, and as predicted by several institutions, not only did it not make a profit, but the loss amount has reached a new high! As of October 16, 2024, the amount payable to the U.S. Treasury for income remittances reached a "negative $204.282 billion."
The negative payable amount indicates that the Federal Reserve is operating at a loss.
The Federal Reserve, equivalent to the central bank of the United States, is different from ordinary commercial banks in that it is not a profit-seeking organization—it does not focus on the pursuit of profit as its core business. Instead, it is concerned with using means such as adjusting interest rates—raising or lowering them—to ensure that the U.S. economy operates within a reasonable range, maintaining low inflation and stability.
At the same time, it promotes employment and improves the labor market, and it does not need to focus on profits. Not focusing on profits does not mean that the Federal Reserve's operations do not generate profits. In most periods, the Federal Reserve's income exceeds its expenses, and it submits this profit to the U.S. Treasury without compensation.
The original purpose of the Federal Reserve's establishment was not to focus on profits. After making money, it transfers the profits to the U.S. Treasury, fully reflecting the position of a non-profit organization and also helping the U.S. federal government maintain fiscal stability—even though this goal has not been achieved, with the U.S. deficit growing higher and higher.
Advertisement
In the Federal Reserve's published balance sheet, when the amount payable to the U.S. Treasury for income remittances is negative, it means that operating income is less than expenses, no money has been made, there is a loss, and naturally, there is no money to give to the Treasury. As of this year's October 16, the loss amount has exceeded $240 billion.
With the loss amount不断扩大, will the Federal Reserve go bankrupt?
Bankruptcy for individuals or businesses often refers to being insolvent, with the total debt exceeding the total assets. The Federal Reserve is merely operating at a loss, with costs exceeding revenue, which does not mean it is insolvent. That is, a loss does not mean that the Federal Reserve has no money in hand.
Still, taking the balance sheet of October 16 as an example, the Federal Reserve's total assets amount to $70,392.84 billion, close to $7.04 trillion. The liability amount is $69,958.34 billion, less than $7 trillion. After subtracting liabilities from assets, the Federal Reserve still has $43.45 billion in net assets.
Even if the Federal Reserve were insolvent, it would not go bankrupt because it is a non-profit organization. What's more important is that the money-printing machine is in its hands; the Federal Reserve is theoretically never short of money. Operating at a loss only indicates that it can no longer support the U.S. Treasury with profits.Federal Reserve officials have repeatedly emphasized that their goal is not profit, and losses will not affect the independence of their monetary policy. Even if the most terrible thing happens and they can't even pay their staff, that's okay. After all, the Federal Reserve has the ability to "print money indefinitely," and it won't stop operating due to losses.
Even if the U.S. Treasury is unwilling to provide subsidies, technically speaking, the Federal Reserve can continue to operate by creating money - that is, printing money, and then destroy the printed dollars when it makes a profit in the future. So, the Federal Reserve will not go bankrupt.
Not being afraid of losses and not going bankrupt does not mean that the Federal Reserve can "ignore losses." The profits the Federal Reserve pays to the Treasury have been an important means for the U.S. federal government to make up for fiscal deficits. If it can no longer pay profits, it will undoubtedly increase U.S. fiscal pressure and push up U.S. debt.
Without the profits paid by the Federal Reserve, the Treasury can only issue more bonds to raise money. This will intensify the bubble of U.S. debt, which in turn may limit the future policy flexibility of the Federal Reserve and even directly affect the stability of the U.S. economy. This is something the Federal Reserve does not want to see, hindering its original intention to find a balance between inflation, interest rates, and financial stability.
The days when the Federal Reserve makes a profit will come soon.
At present, the Federal Reserve is entering a turning point to reduce losses or even turn losses into profits! The income of the Federal Reserve is the U.S. Treasury bonds it holds, which have interest. The bulk of this is U.S. debt purchased when interest rates are low - the interest rate of U.S. debt is fixed at the time of issuance, and the interest income from previously purchased U.S. debt is limited.
The Federal Reserve's expenditures, in addition to "the cost of its own departments - including staff salaries, etc.," are mainly the interest paid to many commercial banks for reserve deposits and the overnight interest rates for other securities transactions conducted for interest rate management.
The Federal Reserve has raised interest rates many times before, leading to higher and higher interest payments to commercial banks - these have expanded with interest rate hikes. The interest rate of the U.S. debt it holds is fixed and low, while the interest rate paid for reserve deposits is rising, resulting in losses.
In layman's terms, the Federal Reserve's losses are "caused by continuous interest rate hikes in the past two or three years." It pays higher interest to commercial banks and market liabilities, but the returns on its assets (i.e., U.S. debt) cannot keep up, so the more it raises interest rates, the more it loses.
In other words, when the Federal Reserve can return to profitability depends on when interest rates will be lowered in the future. Now, the Federal Reserve has entered a rate-cutting channel, which means: the loss amount has reached its peak and will gradually decrease, eventually turning losses into profits.
Leave a Comment