The Federal Reserve has finally stopped losing money for the first time in three years, after unprecedented losses due to the pandemic.
Data from the central bank has shown that since the start of November, the Fed has started to make enough money to slowly start converting an accounting mechanism used to cover its losses.
The size of the Fed’s deferred assets has increased since 5 November, shrinking from US$243.8 billion to US$243.2 billion on 26 November.
Fed watchers do not know how long it will take for the Fed to cover its deferred assets and again return cash to the Treasury, but they suspect that effort will be measured in years.
Through tracking the financial performance of regional Fed banks, a former top Fed staffer who is now chief economist for lobbying group the Bank Policy Institute, Bill Nelson, said the Fed “appears to be on track for the combined profits of the 12 Reserve Banks to be over US$2 billion in the current quarter”.
The Fed’s deferred asset tallies up losses that must be covered before the Fed can again return its profits to the Treasury, as it is required to do by law.
The Fed funds its operations through the income it earns from its bond holdings and from services it provides to the financial sector.
Rate cuts have greatly halted the Fed’s loss-making, meaning the bank has been paying out less to banks to maintain the federal funds target rate range, which now stands at between 3.75% and 4 per cent, after hitting between 5.25 to 5.5% in 2023.
This came after the Fed went on a pandemic bond-buying spree that was pressured by bond holdings topping out and surging inflation pressures that caused the Fed to raise rates in 2022.
