Crazy interest rate hike was bitten by the Fed, which suffered a huge loss of $114.3 billion last year.
The Federal Reserve released its audited financial statements on Tuesday, and the increase in interest expenses (including the reserve balance of the Fed’s reverse repurchase operation) almost tripled in 2023, reaching $281.1 billion. At the same time, the interest income of the Federal Reserve from its asset portfolio last year totaled $163.8 billion (about $170 billion in 2022), and its expenditure exceeded its income by $114.3 billion, which was the biggest operating loss in history.
Since 1916, the Federal Reserve has made profits every year, and will turn over these profits to the US Treasury. Since 1946, these turned-over incomes have risen from less than 0.1% of the US GDP to 3.4% in 2015. It can be said that the profit of the Federal Reserve accounts for an increasing proportion of the US Treasury’s income. By 2022, the Federal Reserve has paid nearly one trillion dollars in revenue to the US Treasury in the last decade. However, in 2023, the Federal Reserve suffered an annual operating loss for the first time, and the loss reached $114.3 billion, which was higher than the absolute profit in any previous year.
The huge losses of the Federal Reserve in 2023 did not suddenly break out. According to the financial report of the Federal Reserve, the assets of the Federal Reserve in the first half of 2023 were 8.34 trillion US dollars, but at the same time, the losses in the first half of the year exceeded 57.3 billion US dollars. Since March 2022, the Federal Reserve has raised the federal funds rate from 0%-0.25% to 5.25% all the way in a short period of one and a half years, and the interest rate of bank reserve and overnight loan has also increased, which has greatly increased the interest that the Fed needs to pay. After the book loss increased in the first half of 2023, the Federal Reserve announced its plan to lay off employees. Although the scale of layoffs only accounts for 1% of the employees of the Federal Reserve, it is the first time that the number of employees in the Fed has decreased since 2010. However, judging from the interest rate choice of monetary policy, the Fed did not "stop" in time.
On July 27th, 2023, the Federal Reserve announced a 25 basis point interest rate hike. After this rate hike, the target range of the US federal funds rate has risen to 5.25%-5.5%, the highest level since 2001, and the Fed has maintained a stable interest rate level since then. According to the Financial Times reporter, in 2023, the Federal Reserve held eight interest rate meetings, of which in January, March, May and July, the Federal Reserve raised interest rates by 25 basis points four times, and in the other four meetings, it chose to stay put.
High interest rates are one of the main reasons for the Fed’s book losses.. In its daily operation, the Federal Reserve earns income from the securities it invests in, and at the same time pays interest on the deposits of banks and other financial institutions in the Federal Reserve. When the interest rate is extremely low, such a revenue and expenditure structure can usually generate huge profits. The Federal Reserve will, while reserving sufficient funds for itself, turn over the excess income to the US Treasury in accordance with legal requirements to offset the federal government’s fiscal deficit. However, since the Federal Reserve began to raise interest rates for the first time in March 2022, the situation has changed after 11 consecutive interest rate hikes. At the same time, the Federal Reserve sharply raised its interest rate target and reduced the size of its balance sheet. Both of these measures are aimed at making monetary policy tight enough to fight stubborn inflation. However, the interest rate hike policy is like two sides of a coin. The benchmark interest rate of the Federal Reserve has increased from 0%-0.25% to 5.25% in July 2023, and has remained stable at this high interest rate since then. The continuous high interest rate has exhausted the once strong profitability of the Federal Reserve.
However, the Fed has repeatedly stressed that,The net loss will not hinder its operation or its ability to implement monetary policy.. It is understood that the Fed can create funds to fund its operations when dealing with operational losses, which means that its operations will not encounter any obstacles. It records losses in an accounting instrument called deferred assets.
When will the Fed return to profitability? It depends on when the Fed will cut interest rates this year and beyond, but from the recent economic data, the market’s expectation of the Fed’s interest rate cut is "shrinking".
According to data released by the World Federation of Large Enterprises on Tuesday, the consumer confidence index dropped slightly from 104.8 a month ago to 104.7. Economists surveyed expected a median of 107. The consumer confidence index in the United States held steady in March, and Americans were optimistic about the current situation, but their pessimism about the future increased slightly. According to the report, respondents don’t think inflation will accelerate again or there is a great risk of economic recession. They seem to be more worried about the general election. Another survey showed that consumer confidence remained stable, and voters waited for the economic direction from the results of the November election.
At present, the inflation in the United States has not completely returned to the target level, and the consumer price index (CPI) in the United States also rose more than expected in February. The data shows that due to the rising cost of gasoline and housing, the seasonally adjusted CPI in the United States at the end of February rose by 3.2% year-on-year, setting a new high since December last year and higher than the market expectation of 3.1%. In addition, the producer price index (PPI) of the United States in February also exceeded expectations, rising by 0.6% from the previous month, the largest increase since August 2023.
Obviously, the stubbornness of inflation will make the Fed’s monetary policy more cautious. Recently, Rafael Bostic, president of the Federal Reserve Bank of Atlanta, said that due to persistent inflation and stronger-than-expected economic data, he expected the Fed to cut interest rates only once this year, instead of twice as he had expected.