As Interest Rates Rise, Fed Operating Losses Grow

Increasing interest rates will lead to increased operating losses for the Federal Reserve and could force the Federal Reserve to halt remittance payments for "some time" to the US Treasury, which would significantly impact a major source of government revenue, according to new projections from the New York Federal Reserve.

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As the New York Fed said in a report released on Tuesday, "The negative net income is a result of the policy rate increases undertaken by the Federal Reserve to fulfill its congressional mandate to achieve maximum employment and price stability," a federal report released by the central bank found. “In the long run, it is expected that the net income will turn positive again as time progresses."

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In the month of September, the Fed said it had recorded a deferred asset of $16.6 billion after ceasing to make payments to the Treasury in 2022. A report issued by the US central bank on its annual audited financial statements for 2022 showed that payments to the Treasury up to that point amounted to $76 billion, compared to $109 billion the year before.

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There has been an increase in interest rates by the Fed over the last year as a response to the strongest inflation since the 1930s, which brought the benchmark rate up to a range of 4.75% to 5%, up from near zero as recently as last month.

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A slew of other measures was taken by the central bank last year, including the reduction of its balance sheet, and in recent months it has reduced its holdings by as much as $95 billion a month.

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The hikes in interest rates by the Fed have resulted in the US central bank paying more interest on its liabilities, including those liabilities that are parked overnight in the reverse repurchase facility of the Federal Reserve Bank, as well as the interest it pays on deposits at the Fed, which are parked with the Fed. 

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It is estimated that as of September 2022, the Fed's interest payments on its bonds will be greater than the interest earned on the bonds it holds. There has been an increase in operating losses at the Fed, which has created a hole for the Treasury to fill, which may ultimately have led to more debt issuance.

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