By Nicolas Cachanosky, American Institute For Economic Research
The Federal Reserve recently disclosed its preliminary income and expenses for 2023, revealing an unprecedented $114.3 billion in operational losses. Somewhat surprisingly, Fed officials seem unconcerned about this financial performance. Their lack of concern may be even more worrisome than the losses themselves. Like any financial institution, the Fed receives revenue from the financial assets it holds and it must pay interest on its financial liabilities. Arguably, the last round of QE played a role in setting up current Fed losses.
One key aspect of the Federal Reserve Act is its obligation to remit its profits to the US Treasury. When the Fed experiences losses, however, it doesn’t lead to the Treasury cutting a check. Instead, the Fed issues an IOU known as “deferred assets,” essentially monetizing its own deficits. Moving forward, the Fed will use future profits to offset these deferred assets before resuming regular remittances to the Treasury.
The Federal Reserve, in response to these record losses, asserts that a “deferred asset has no implications for the Federal Reserve’s conduct of monetary policy or its ability to meet its financial obligations.” The first statement, that deferred assets have no implications on the execution of monetary policy, is questionable. The second statement, that it has no bearing on the Fed meeting its financial obligations, is redundant.
Firstly, the impact on market expectations is paramount for the effectiveness of monetary policy. Sustained Federal Reserve deficits leading to deferred assets could sow seeds of doubt among the public regarding the Fed’s future actions. While doubts may not come from the Fed itself, they could come from Congress, which may push for the Fed to return to financial stability and resume contributions to the Treasury. Such doubts would have a precedent in the Fed’s increasing involvement in fiscal policy since 2008. The Fed’s recent history jeopardizes the perception that it is independent, which is a crucial element for the effectiveness of monetary policy.
Secondly, claiming that deferred assets have no implications for the Fed’s ability to meet financial obligations acknowledges...(READ THIS FULL ARTICLE HERE).
