US Federal Reserve announces largest ever operating loss in 2023

The US declares its largest operating loss in fiscal year 2023 due to surging interest rates resulting in a $114.3 billion increase in expenses.

The United States declared its largest-ever operating loss in the fiscal year 2023, on Friday, marking a staggering impact of surging interest rates on its financial position.

The revelation comes as the Federal Reserve aggressively increased the benchmark lending rate back in March 2022, aiming to curb a worrisome surge in inflation that had breached the long-term target of two percent.

Policymakers swiftly escalated rates to a 22-year high, maintaining this stance ever since. Consequently, the cost of interest paid out by the U.S. central bank to banks storing their funds at the Fed soared, leading to a substantial rise in expenses that surpassed estimated earnings by a significant $114.3 billion, according to an official statement from the central bank.

Despite facing its worst-ever operating loss, the Federal Reserve finds itself in a unique position. There is no immediate need to seek additional funding from Congress or the Treasury Department to bridge the financial gap. In normal circumstances, the Fed’s 12 regional banks transfer their earnings to the Treasury Department after deducting necessary costs, such as interest payments to banks.

However, during periods of losses exceeding earnings, as experienced since September2022, the Federal Reserve classifies these losses as a “deferred asset,” temporarily halting the transfer of funds to the Treasury. The central bank will only resume such transfers when its earnings surpass these deferred assets, a scenario expected to unfold once interest rates start to decline.

Given the magnitude of the losses incurred by the Federal Reserve in the past year and the cumulative “deferred asset” standing at $133 billion since Sep 2022, a recovery to a surplus position may take some time. The situation highlights the intricacies of the Federal Reserve’s financial management amid economic challenges and its reliance on future interest rate trends to restore fiscal equilibrium.

Source: AFP