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fed's losses exceed $200 billion mark!

the federal reserve reported on thursday that its losses had topped the $200 billion mark. as of wednesday, the fed's return to the treasury, a measure of its financial performance, had reached -$201.2 billion. however, fed officials emphasized that this indicator does not affect the implementation of the fed's monetary policy.

schematic diagram of the federal reserve turning over profits to the treasury (data source: st. louis fed official website)

why is the fed losing money?

it is reported that the indicator is called "earnings remittances due to the us treasury" (earnings remittances due to the us treasury) and is published once a week. according to data released on wednesday, the indicator was -201.237 billion u.s. dollars, a new low since the data began to be collected.

this loss stems from the interest paid by the federal reserve to major financial institutions during this interest rate hike cycle. to keep short-term interest rates at target, the fed needs to pay banks and money funds compensation for deposits held with the central bank. the cost of this interest rate management already exceeds the interest income generated by the fed's bond holdings.

starting in 2022, in order to curb continued high inflation, the federal reserve began to raise interest rates, raising the benchmark interest rate from near zero to a range of 5.25% to 5.5%. in march this year, the fed disclosed a paper loss of $114.3 billion last year. of this amount, the fed paid approximately $176.8 billion to banks and $104.3 billion through reverse repurchase facilities, while earning $163.8 billion from bond interest.

the fed's revenue comes from services it provides to banks and from interest on the bonds it holds. by law, the fed must turn profits over to the u.s. treasury. according to research by the federal reserve bank of st. louis, from 2011 to 2021, the federal reserve handed over nearly $1 trillion to the u.s. treasury.

but fed officials emphasized that this indicator reflects paper losses and will not affect its ability to implement monetary policy.

the fed may continue to cut interest rates

since announcing a substantial 50 basis point interest rate cut in september, the pace of subsequent interest rate cuts by the federal reserve has become the focus of investors.

according to the forecast of the chicago mercantile exchange (cme) "fed watch", the probability of the federal reserve cutting interest rates by 25 basis points in november is 62.5%, and the probability of cutting interest rates by 50 basis points is 37.5%. the probability of a cumulative 50 basis point interest rate cut by december is 44.5%, the probability of a cumulative 75 basis point interest rate cut is 44.7%, and the probability of a cumulative 100 basis point interest rate cut is 10.8%.

employment data remains one of the fed's most closely watched indicators. currently, the market's focus is on the u.s. september non-farm payrolls report to be released this evening, beijing time. according to the dow jones consensus, the number of non-farm payrolls increased to 150,000 in september from 142,000 last month, and the unemployment rate remained stable at 4.2% in september. if the data is in line with expectations, it will allow the fed to continue lowering interest rates. because of the substantial revision in previous data, david kelly, chief global strategist at jp morgan asset management, said: "although we expect non-farm payrolls to increase by 150,000 in september, i would not be surprised if it increased by 50,000 or 250,000."

chicago federal reserve president austan goolsbee said on wednesday that interest rates will need to drop "a lot" in the next year. goolsbee said that the fed's attention has now expanded from focusing on inflation to the job market. he emphasized that it hopes to avoid a further increase in the unemployment rate (currently at 4.2%). "inflation is falling and close to target, the unemployment rate has risen, the job market is basically where we want it to be, and interest rates need to come down a lot over the next 12 months," goolsbee said.

with the federal reserve recently cutting interest rates by half a percentage point and potentially further easing policy, its loss growth is expected to slow as interest payments needed to maintain its rate target are expected to be lower. still, before the fed can allocate money to the treasury again, it must first offset deferred assets, which could take several years.