The Fed’s $100 billion cash losses should be a far bigger story

Editor’s note: This piece was updated to correct the dollar figure associated with mortgage-backed securities owned by the Fed. We regret the error.

The Federal Reserve’s Sept. 14 H.4.1 release shows that the Fed’s system-wide cash operating losses now surpass $100 billion. The Fed’s losses will continue accumulating at about $2.5 billion per week as long as interest rates remain at current levels. 

By Sept. 30, the end of the 2023 federal fiscal year, the Fed will have spent about $110 billion to cover cash losses — about $9 billion in operating expenses and a bit more than $100 billion in net interest expense. A $110 billion loss is big by any standard, and yet the mystique surrounding the Fed’s money printing power has led many to dismiss the importance of these losses.

The Fed owns a little under $8 trillion in Treasury and mortgage-backed securities which, on average, earn about 2 percent interest. It has paid for these securities by issuing about $2.3 trillion in paper currency (federal reserve notes), more than $500 billion in non-interest-bearing deposits, and borrowed the remaining $5 trillion-plus from banks and money market funds. The Fed currently pays more than 5 percent interest on the money it borrows.

By convention, the Fed’s losses are not counted as federal government expenditures nor are the Fed’s borrowings counted in U.S. Treasury debt statistics. Nonetheless, these expenditures are federal government expenditures and the Fed’s borrowings stand pari passu with debt issued by the U.S. Treasury.

For most of its history, the Federal Reserve made operating profits and remitted them to the U.S. Treasury. Fed remittances reduced federal expenditures and net federal budget interest outlays. However, Federal Reserve operating losses are not treated symmetrically in federal budget accounting conventions, in part perhaps because no one likely ever imagined that the Federal Reserve system would lose money, let alone lose over $100 billion in a single year.

Today, the Fed is quietly losing a fortune and committing taxpayers to repay billions of dollars in new Fed-incurred debt because the Fed’s losses and associated indebtedness are not currently reported in the federal budget and debt statistics.

The Congressional Budget Office estimates that the federal government will spend $6.206 trillion in fiscal year 2023. This figure excludes Federal Reserve system losses of about $110 billion or about 1.8 percent of the CBO’s total estimated federal spending. Similarly, the CBO estimates 2023 fiscal year federal government net interest expenses of $640 billion, an understatement of $100 billion once Federal Reserve system interest expenses are recognized.

Congress and the public may or may not have a problem with the Fed losing $100 billion taxpayer dollars or more annually as it pursues its dual mandate of price stability and full employment. A consensus has yet to emerge regarding whether the Fed’s quantitative easing policies created economic benefits sufficiently large to justify the taxpayer costs being realized by the Fed today. 

However, without improved transparency of the Federal Reserves’ losses in the context of federal budget and debt statistics, we may never have an informed public debate.        

Paul Kupiec is a senior fellow at the American Enterprise Institute.