The Federal Reserve System lost over $114 billion in 2023. This seems unfathomable and it is!!! There is an explanation...but it ain't good!!! You can argue that the money the Fed prints is an asset. It can theoretically be placed into a bank or invest in anything.
Alas, from the Fed’s perspective, money is a liability - actually a form of debt. It appears on the liabilities side of the Fed’s balance sheet. Just look at a dollar bill in your purse or wallet some day and read it. It says, “Federal Reserve Note.” And a note is a form of debt. So, the Fed can’t print its way out of an operating loss.
When the Fed prints money, it is essentially buying Treasury notes or mortgages from big banks. The money comes out of thin air, but the Treasuries and mortgages are delivered to the Fed and go on the balance sheet as assets.
A few years ago, the Fed loaded up on notes with interest rates around 2.0%. Many of those notes have five- or ten-year maturities and they’re still on the balance sheet. Meanwhile, the Fed pays banks interest on excess reserves deposited by the banks with the Fed. That’s an overnight rate closer to 5.0% today. You don’t need to be a math major to see that if you earn 2.0% on your assets and pay 5.0% on your liabilities, you lose money.
This is exactly what is happening with the Fed. This does not happen in isolation. When the Fed makes money, they hand over the profits to the Treasury in net of operating costs. However, when the Fed loses money, the Treasury has to subsidize the Fed, and the money comes out of taxpayer funds. This all begs the question: Is the Fed going broke? YES!. Not only is the Fed losing money with negative cash flow, but its capital is also evaporating. If you marked the Fed’s balance sheet to market (something the Fed does not do), it would show negative net worth from time to time.
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