QE has produced years of hangover.
By Wolf Richter for WOLF STREET.
The Fed disclosed two types of losses in its audited annual report today: An operating loss of $77.6 billion for the year 2024, substantially less bad than its operating loss in 2023 of $114 billion. And cumulative “unrealized losses” of $1.06 trillion at the end of 2024, on its holdings of Treasury securities and MBS, up from $948 billion at the end of 2023.
The operating loss of $77.6 billion derived mostly from its interest income being far lower than its interest expenses.
The Fed reported:
- $158.8 billion of interest income from its shrinking portfolio of Treasury securities and MBS, whittled down by $2.2 trillion in QT
- $0.3 billion in other income and losses, including $1.4 billion in losses from “foreign currency translation,” and income from various services it provides to banks and government agencies.
Minus…
- $186.4 billion in interest expense — Interest on Reserve Balances — that it paid banks
- $40.3 billion in interest expense on overnight reverse repos (ON RRPs) that it paid to its counterparties, mostly money market funds.
- $9.9 billion in operating expenses, including:
- $2.7 billion for the Federal Reserve Board of Governors including printing and managing the Federal Reserve Notes (the paper dollars)
- $4.2 billion in salaries
- $663 million in costs of the Consumer Financial Protection Bureau.
Interest rates on reserves and ON RRPs, among the Fed’s five policy rates, started rising in 2022 with the rate hikes. But the dollar amounts got smaller as the Fed shed securities via its QT program: By the end of 2024, ON RRP balances were largely gone, having dropped by over $2 trillion from their peak in 2021, but reserves were roughly unchanged and still over $3 trillion.
In addition, the rate cuts in late 2024 lowered the amounts in interest that the Fed paid on reserves and ON RRPs. Hence the smaller losses in 2024.
On a quarterly basis, the Fed started booking operating losses in Q4 2022.
The “unrealized losses.”
The Fed’s cumulative “unrealized losses” on its holdings of Treasury securities and MBS rose to $1.06 trillion at the end of 2024, from $948 billion at the end of 2023.
The losses got bigger because longer-term yields rose in the final months of 2024, following the Fed’s monster rate cut in September 2024. Higher yields mean lower market prices for longer-term bonds.
These cumulative unrealized losses are the difference between the securities’ amortized cost (which will be equal to face value by the time the security matures) and their market value at the end of the year:
- Securities at amortized cost: $6.75 trillion
- Market value at year-end: $5.69 trillion
- Cumulative unrealized loss: $1.06 trillion.
The Fed bought most of these securities years ago when yields were far lower than at year-end 2024. As yields on Treasury securities and MBS rose starting in 2021, their market values declined.
As Treasury securities get closer to their maturity date, the unrealized losses diminish and become zero when the securities mature because the holder gets paid face value.
MBS are paid back mostly via passthrough principal payments as the underlying mortgages are paid off when the home is sold or refinanced, and as regular mortgage principal payments are made. When the pool of underlying mortgages shrinks enough, the MBS are “called,” and the holder gets paid face value for the remaining balance. It’s unlikely that any of the MBS will still exist by their maturity date; the Fed will get its money back much sooner.
Unrealized losses represent the losses the Fed would have incurred if it had sold all its securities at market prices at the end of 2024.
If the Fed never sells any of these securities, but waits till they mature, at which point it gets paid face value, those unrealized losses vanish without a trace.
The dividend.
Despite the losses, the Fed paid the statutory dividend, as required by the Federal Reserve Act, to the shareholders of the 12 Federal Reserve Banks. The annual report describes the formula laid out in the FRA for how the dividends are calculated.
In 2024, the Fed paid $1.62 billion in dividends (up from $1.48 billion in 2023).
Losses don’t matter to the Fed but matter to the Taxpayer.
The Fed creates its own money and therefore cannot become insolvent. So to the Fed, these losses are just a visual blemish.
But these losses matter to the Treasury Department – and thereby the taxpayer. The Fed has to remit nearly all of its operating income to the Treasury Department (similar to a 100% income tax). Those remittances stopped when the Fed stopped generating operating income in September 2022.
From 2008 through September 2022, the Fed remitted $1.36 trillion to the Treasury Department. At Treasury, these funds became part of the flow of tax receipts.
QE was a huge gravy train for taxpayers, as the Fed loaded up on securities, generating remittances of $1.1 trillion from 2009 through Q3 2022. But the flow of these funds to Treasury stopped with the losses in September 2022.
The losses pile up as a negative liability on the Fed’s balance sheet – the negative amount due the Treasury Department – that keeps getting larger.
As of the balance sheet on Thursday, that negative amount reached -$224 billion, representing the total cumulative operating losses from September 2022 through Wednesday.
The Fed’s operating losses will continue to decline for a while, but as long as it has any operating losses, the cumulative negative amount grows. When the Fed starts generating operating income again, it will go against that negative amount and whittle it down over time. Remittances to Treasury will restart after the negative balance has been reduced to zero, and that account then turns positive. This will take years.
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“If the Fed never sells any of these securities, but waits till they mature, at which point it gets paid face value, those unrealized losses vanish without a trace.”
But presumably those losses appear in the year to year P&L as the difference between the rate received on those low interest bonds and the finance cost.
Or is the finance cost just zero because they printed the money to acquire them?
The “unrealized losses” do not appear in the Income Statement (what you called the P&L). They appear in the footnotes of the balance sheet (all banks disclose their unrealized losses in the footnotes).
But the “operating losses” are what the income statement is all about. The “finance cost”… I’m not sure what you mean. But the interest expense that the Fed paid is the biggest expense of the income statement, and I listed it. It’s bigger than the interest income, hence these big “operating losses.”
The Fed is an interesting yet confusing entity, thanks for some clarity on the subject.
The line item, “Federal Reserve Earnings,” on the deposit side of the Daily Treasury Statement shows for fiscal year-to-date a deposit of $2.5 billion. Small potatoes, relatively speaking, but after having read the article, I would have thought the above figure would be zero.
https://fiscaldata.treasury.gov/datasets/daily-treasury-statement/operating-cash-balance
It’s amazing how much inflation one can create with stupid, but like they said it’s only transitory.
Good grief! They based that statement on historical similarities and that turned out to be wrong. With 20/20 hindsight we can see why it was wrong but it was a reasonable prediction given the data at the time.
They’ve admitted they were wrong. They’ve explained why they were wrong. They’ve changed their policies because they were wrong.
What more do you want? A crystal ball and a time machine?
Most people I know don’t handle being obviously and painfully wrong nearly so well.
people are upset because it was obvious they were wrong at the time, and no the historical similarities were not in line with those projections, and after they admitted they were wrong, they took a painfully long time to undo their mistakes, and are continuing to do that. meanwhile, they spout platitudes about “keeping an eye on things,” all while seemingly taking every step necessary to ensure that the rich get to keep their ill-gotten gains.
Well said, Franz G.
Maybe the Fed should just reorganize and become the next hot meme stock. Valued at 100x P/S (Interest Income), they could repay the national debt and solve all our problems! :-)
If you are given so much power and resources then just admitting being wrong and sorry is not enough.
If in my Job I do this then I’d be fired.
Also fed didn’t suffer but the common people still suffering from their stupid mistakes but rich became richer.
“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and an ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”
— Jens Parsson, Dying of Money
It’s small in comparison to the overall federal deficit and debt, but the postponement of remittances to the U.S. Treasury is reprehensible. It’s an accounting gimmick.
interesting, need to add that to my reading list.
it lines up with what the u.s. experience. some economists have said that the 2016 and on prosperity is really an austrian crack up boom. guess we’ll see in the next 15 years.
The Austrian’s are wrong in their understanding. The FED creates both the boom and the bust.
So, as I understand it the Fed paid $1.62 billion in dividends to commercial banks while having an operating loss of $78 billion.
So what does this mean from the annual report?
“A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.”
Yeah, the shareholders are on the hook to lose half the par value of their stock holdings in the Federal Reserve Bank of which they hold the shares. But that par value is minuscule because it hasn’t been changed. These are not publicly traded shares. So for example, if you and I hold shares of Misbegotten National Bank, and the bank collapses, your and my loss can be 100% with our shares becoming worthless. But the losses of the FRB shareholders are limited to 50% of par value.
The Federal Reserve exists in a political limbo, its actions neither mandated by the legislative branch nor imposed upon by the executive branch. In the economic sense, its goal is not only to mitigate inflation but to support the continuation of positive economic environments across the U.S., and thereby the world. Considering its importance to global GDP, it would be only reasonable if the other countries of the world had a say in it.
No offense intended, Dark Sport. The second half of your post is highly ironic to me, but that is because I am quite cynical. The idea that the “goal” of the Fed is to mitigate inflation is truly laughable given its performance in over the last seventy years.
–Geezer
Other countries have central banks and if the economies of other countries were as big as the US, those central bank decisions would affect the rest of the world without any input too. In my opinion Japan’s Central bank influence in the world may be a tad exaggerated along the UK’s.
Member banks of the US Federal reserve include some foreign banks if I recall correctly.
AGREE totally with NJGeez on this subject:
The FRB was set up for one and only one reason: TO PROTECT THE BANKSTERS at the expense of workers and savers.
Anyone looking at the vast and ongoing destruction of the value of the USD since the inception of the FRB, now worth approximately 1/33, ONE THIRTYTHIRD of what it was in 1913, and considering any other reason for the continuing existence of the FRB is fully immersed in that river in Africa, ”de Nile.”
Laughably and totally false assertions.
LOL, 1913? My parents hadn’t even been born then. The world has changed. I don’t give a hoot about how much anything cost in 1913. Lots of the things we pay for and benefit from today didn’t even exist back then, from health insurance and airline tickets to modern motor vehicles and this website, or any website. And don’t tell me that life in those good old times of 2013 was somehow better than today because, you know, a haircut cost 50 cents or whatever.
Dark sport,
The idea that the economic growth here is somehow well intended to help the rest of the world misses what this country has been doing since its founding to build its wealth and power worldwide while benefitting only a fraction of the society it represents. The example are endless with regard to economics and foreign policy. Bring productive forces to countries rather than labor and natural resource extraction would be far more beneficial but far less profitable, which is all it comes down to here.
T: Temporary
R: Rising
A: Abrupt
N: Notable
S: Short-lived
I: Impulsive
T: Time-bound
O: Occasional
R: Reversible
Y: Yields (as in, yielding to normal levels)
$4.2 Billion in salaries? Losing money for two straight years? The creation of 25 percent cumulative price inflation in just a few years? Unprecedented income and wealth inequality?End the Fed!
100% Agree, they have an army of PHDs to tell them to raise or lower interest rates and start and stop QE/QT
They, with congress have decimated the poor and middle class.
I think they do more harm than good. I am all for abolishing the FED and roll any deputies that are critical into the Treasury.
Well, the Federal Reserve whose primary role is to regulate and ensure the safety of banking was created by an act of Congress and fortunately will be with us for the foreseeable future.
Help the US have the strongest economy in the world.
Prevent systemic banking failure and Great Depression 2.0 in 2008 due to shady bank behavior.
Stop economic collapse in 2020 as a result of a global pandemic.
Reduce rampant inflation and keep pressure on to keep heading towards the 2% goal without breaking anything.
Yes… End the Fed.
They’re not perfect, and the inflation problem is largely of their own making due to the previous two actions, but we’re a damned sight better off with them than without them.
The economy before the GD was self-correcting.
Brian-
“ …we’re a damned sight better off with them [the Fed] than without them.”
The growing level of Federal debt is largely a byproduct of central bank meddling and price fixing in the U.S. Treasury markets, IMHO.
Hyper-indebtedness will break itself some day — then you might need to rethink your analysis.
The federal debt is 100% caused by the US Congress and nobody else whatsoever is to blame for that intractable problem.
SoCalBeachDude,
Then by extension, American voters are 100% responsible.
THIS!
So true. Blue collar worker here. So grateful to have the fed even out the panics and depressions.
4.2b is 4,200 million, right? How many employees do they have?!
What’s your problem???? The number of employees at the Federal Reserve System (ca. 29,000) is MINUSCULE compared to Walmart (2.1 million).
23,000 employees — so salary costs come out to be $185,000 per employee. That’s probably low for a highly educated workforce.
$4.2 billion in salaries? What is the context for such a high number?
It’s really not that high for a large organization. That could be roughly 20,000 to 40,000 people depending on average compensation–$100,000 to $200,000, respectively. Presumably, the number includes retirement benefits and healthcare, so a lot of people at the equivalent of a federal GS-14 at a high step with locality pay would run up to $200K easily.
Remember, the Fed isn’t just a dozen people in a room deciding the interest rate. They are a federal regulator for a wide variety of banks and bank holding companies (which means doing lots of institution-specific examinations), they run payment clearing systems, etc. The monetary policy side also generates a lot of research papers and statistics.
Klaus Kastner
There are 12 regional Federal Reserve Banks plus the Federal Reserve Board of Governors. These are huge financial and regulatory institutions that do a lot of stuff that you just don’t know about, from regulating all federally charted banks to managing our physical currency.
Are older MBS commonly called when market value is below par? In that situation who eats the loss? Will the rise in interest rates mean that fewer MBS will be called than has historically been the case?
1. No
2. If MBS are called, they’re called at FACE value, not at market value, and there are no losses involved. The Fed and other holders will get their money back if they bought at issuance.
3. Yes, but mortgage payoffs continue, just at a slower pace than during 2020-2022. There are fewer refis, and fewer sales that entail a mortgage payoff, but there are still some refis, and people still sell homes and their mortgage gets paid off, and people still make mortgage payments. So the process is still moving forward, but at a s lower pace.
First off I just want to say this is a great article and I wanted to say thank you for all you do!! I have been reading your stuff for about a year now and will continue to do so!
I’m curious of what your opinion is on how the Fed has and is handling things. In my opinion society puts too much blame on the Fed for Inflation and economic conditions. Yes they play a factor in it but isn’t the real root cause for all this a combination of the Financial crisis and Covid? I mean if we hadn’t shut down the US economy during Covid we wouldn’t have needed all the stimulus. Everyone loved those stimulus checks and being paid to sit at home but where did they think that money was coming from and that it wouldn’t be painful to pay it back. Plus we are still feeling the ramifications from the financial crisis. Realtors knew long before 2020 that inventory levels were headed into a massive shortage. Most of the builders went under after the crisis and we have not been building an adequate amount of new housing ever since. The housing inflation was inevitable, it was just exposed when we had those historic low rates in 2020-2021.
The Fed has a tough job in my opinion. They have to clean up all the messes we make. We show them gratitude by blaiming them. Could they have done things slightly different, yes but so far they have brought down inflation, we haven’t had a recession yet, the job market is still healthy.
Hell do they have anything to do with the price of eggs? Do they impose tariffs? Did they create mortgage backed securities that required no down payment with no verification of income, assets or employment for people with 620 credit scores?
Andrew:
Totally agree! Thank god for the FED!
Their primary job is to clean up the messes created by irresponsible administrations and even more irresponsible congressmen. It is a hard job and frankly a thankless job.
“Slowing further or stopping redemptions of securities holdings will be appropriate as we get closer to an ample level of reserves. But in my view we are not there yet because reserve balances stand at over $3 trillion and this level is abundant,” Waller said
“There is no evidence from money market indicators or my outreach conversations that the banking system is getting close to an ample level of reserves,” Waller said.
And he’s right.
This comment could have been under all the dot plot stuff.
Someone from another country reading about the vote of these private banks might think the Fed consisted or was composed of them. And that when an emergency like GFC or covid occurred, they all chipped in. They don’t and the Fed is a separate creature. Only it can create money.
Of course their input is sought. The Bank of Canada confers with the Big Six but there is no vote by them on BoC action. Same with BoE.
A casual observer might think the GFC crisis was resolved the same way JP Morgan resolved the crisis of 1907, when he locked the finance CEO’s into his library until they agreed on a bailout.