We find a good place to go rubbernecking.
By Wolf Richter for WOLF STREET.
A collapse chart has been making the rounds on social media, financial blogs and more. It’s distributed without context, like it’s self-explanatory, kind of like, look, the world is falling apart. It’s from the St. Louis Fed data repository. The title of the chart reads, among other things, ominously, “Liabilities: Remittances due to US Treasury.” Either way, it breaks the WOLF STREET saying, “Nothing goes wrong in a straight line”.
But beyond the fun aspects of the chart, there’s something going on in the Fed’s balance sheet that’s getting bigger and bigger: how much money is the Fed losing, where is that lost money showing up- it and how it derails a gravy boat of taxpayers. The chart reflects this in a weird way – it does a switcheroo – which we’ll get to in a moment.
A liability is money the Fed owes another entity – in this case, money the Fed owes the US Treasury Department. But this particular liability account, “Remittances Due to the U.S. Treasury,” is kind of a funny creature.
It has a negative balance of -$13.2 billion according to the Fed’s weekly balance sheet released yesterday. On a balance sheet measured in trillions, that’s pretty small. But it’s gonna get a lot funkier.
Fed revenue, normally.
Fed revenue come from interest and fees. The main source is the interest it earns on its $8.17 trillion portfolio of Treasuries and MBS, which earned the Fed $122.4 billion in interest in 2021. The Fed charges also charges for various services it provides to the banking system. In total, in 2021, the Fed had $123.1 billion in revenue.
Fed spending come from operating costs and the interest it pays. Operating expenses for the Federal Reserve’s 12 regional banks totaled $5.3 billion last year. It also paid interest on reserves and reverse repos. Last year, with an interest rate on reserves of just 0.15%, the Fed paid $5.3 billion in interest on reserves and $414 million in interest on repos overnight (RRP). And there were other expenses. Total expenditures amounted to $15.5 billion.
The Fed also paid dividends $585 million to shareholders of the 12 regional Federal Reserve Banks. The shareholders of the 12 FRBs are the financial institutions of their constituency.
The Fed must hand over its net income at the US Treasury Department. Its net income (income less expenses less dividends) was $107.8 billion. The Fed must return to the US Treasury Department almost all of its revenue and any capital in excess of its statutory capital limit, set by Congress. He announces these numbers every January, and I dutifully covered it every January, including January 2022.
Over the past 21 years, the Fed has handed over $1.28 trillion to the Treasury Department! Since QE began in 2009, it has paid out $1.07 trillion. In this regard, printing money was a sauce for the taxpayer.
But this is all going to end as the Fed will take a net loss this year and for years to come.
How much money can the Fed lose? 280 billion dollars in 2023?
This year, the amount of interest the Fed pays on reserves (to banks) and pays on its overnight RRPs (mainly to Treasury money market funds) has skyrocketed as the Fed raised interest rate close to 0% last year. 3.9% on reserves and 3.8% on overnight RRPs from early November.
Currently, the Fed is paying $2.4 billion one week interest on $3.2 trillion in reserves. And it’s worth $1.6 billion one week in interest for counterparties of $2.15 trillion in overnight RRP. At current rates and balances, this represents a cash outflow of about $4 billion per week ($208 billion annualized).
QT, which destroys money in the financial system, has the effect of reducing the combined balance of reserves and RRP. Both have come down from their highs and there are changes between them. And on a combined basis, both will continue to decrease during QT.
Thus, the balances on which the Fed will pay interest will decrease.
But the interest rates the Fed is paying on those balances will likely rise 50 basis points next week, and more next year, and heaven only knows how far the Fed will go. But every time the Fed raises rates, it has to pay more interest.
So if the average combined balances in 2023 of overnight reserves and RRPs are $4.5 trillion, and if the Fed pays an average of 5% on those balances, it will pay out $225 billion in interest.
At the same time, QT will reduce its portfolio of interest-bearing securities and its interest income will decrease.
The Fed’s net loss in 2023 could be north of $260 billion.
This does not include the losses the Fed would incur if it started outright selling about $15 billion a month in MBS to bring the runoff closer to the $35 billion cap. This could push the total loss to over $280 billion in 2023.
To sum up:
- QT reduces Fed losses by reducing reserves and RRP balances on which the Fed pays interest. Enough QT will eliminate Fed losses.
- The rate hikes created the Fed’s losses, and further rate hikes increase the losses until QT drives down reserves and RRPs.
The switcheroo in the collapse-chart.
The chart follows the line item “Remittances due to the US Treasury” on the Fed’s weekly balance sheet (second “table 6”, liabilities). This is normally a line that follows the weekly increase the amount the Fed estimates it owes the US Treasury over the year.
“Normally” means at a time when the Fed is making money. Each week adds up. For example, in 2021, the 52 weekly amounts, each between $500 million and $4 billion, totaled $106 billion that the Fed owed the Treasury Department. Close enough for an estimate of $107.4 billion in remittances for the year.
But when the Fed started losing money on a weekly basis in September, the account made a switcheroo. Instead of showing the “weekly change” as normal, it shows the “cumulative loss since September 2022”.
In other words, when the Fed started losing money on a weekly basis in September 2022, the account went from a weekly change of a positive balance, to show the cumulative total negative balance. It no longer displays the weekly variation but its total loss since September 2022.
This switch from “weekly change” to “cumulative balance” is a funny way to do something? But it makes sense, and here’s why:
In theory, if the amount the Fed owes the US Treasury is negative, that would mean that the US Treasury owes that amount to the Fed and should pay the Fed. But that’s none of their business. Their agreement is that the transfer of funds is a one-way channel, from the Fed to the Treasury.
And when it turns negative, the Fed will sit on the negative balance which will grow over the years as long as the Fed loses money. And when the Fed makes money again, the Fed not will remit its net income to the Treasury Department, but apply it to this pile of accumulated losses until the pile is depleted. When the stack is depleted, the Fed starts handing over its profits to the Treasury again.
The Fed calls this growing pile of losses a “deferred asset.”
No, that wasn’t one of my infamous sarcastic remarks. The Fed calls this growing pile of accumulated losses a “deferred asset.”
Storing losses on the balance sheet as an asset, rather than immediately showing the loss in the income statement, is an old business accounting trick, encouraged by GAAP, and includes accounts as infamous as “Goodwill”. and “Intangible assets”. The Fed is kind of sticking to underhand corporate accounting 101 here.
The Fed explains this in footnote #8 of Table 6:
“Positive sums [from January to early September] represent estimated weekly remittances due to the US Treasury.
“Negative amounts [since early September] represent the cumulative position of deferred assets, which is incurred during a period when profits are not sufficient to cover the cost of operations, the payment of dividends and the maintenance of surplus.
“The deferred asset is the amount of net profit Federal Reserve banks must make before remittances to the US Treasury resume.”
In other words, each week going forward, the chart will show the Fed’s total losses from September 2022. The larger the negative number, the larger the accumulated loss.
And the chart will continue to violate WOLF STREET’s saying that “nothing goes wrong in a straight line” and by 2024 could be a hoot.
At some point in the future, when the Fed starts making money again, the line will begin to curve upwards as Fed income is applied to this stack of accumulated losses. And when the Fed gets back all the money it lost, the line will move back into positive territory, and then the Fed will start handing over its revenue to the Treasury Department. And we’ll be back to normal. Phew!
The Fed, which creates and destroys money, cannot run out of money.
I mean, we knew that from the start. The Fed is not Enron, although the loss accounting may seem similar. The Fed creates its own currency. And the Fed’s losses – no matter how big – won’t cause it to run out of money because it can always create more. So we can take that off our list of worries. For the Fed, a loss is just an accounting entry, not an existential crisis.
The Fed won’t print money to pay for its losses – it won’t need it. But he will use some of the money from the QT roll-offs that would have been destroyed and pay interest with it. And so that the money for interest payments comes out, and the balance sheet will shrink on the right track with QT.
A new addition to my monthly QT reports.
I discuss the effects of QT on Fed assets on a monthly basis (most recently, “Fed Balance Sheet Falls $381 Billion From Peak: December QT Update”), and just to For our theoretical amusement, I’ll add the graph of the pile of accumulated losses which should become a real hoot as we go along, so we can do some ranting here:
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#big #Feds #losses