bee Calculated Risk On 3/04/2025 08:28:00 AM
From Housing Economist Tom Lawler: Federal Reserve Earnings Still Running Negative; No remittances to treasury for a while
The Sharp Runup in Short-TERM interest rates over the last few years that followed the Federal Reserve's HUGE PURCHASES OF LONGERM Treasuries and MBS at Extremely Low Interest Rates Has Results in Negative Earnings at the Federal Reserve Since the Latter Part of 2022. Funded the bulk of these long-term fixed rate assets with increases in interest-bearing Very short-term liabilities-mainly deposit Institution deposits (reserves) and repos-whom interest rates tied to the federal funds rate. While the Fed has more interesting Earning Assets than interest-bearing liabilities-with the “gap” mainly reflecting federal reserve notes outsourting (Currency) and Treasury General Account Deposits-The Sharp Increase The Federal Funds Rate Results in Interest Expense Surging Relative To The Fed's Long Duration Assets.
Below is a Table Showing Federal Reserve Net Income – The Vast Bulk of which reflects just interest income – from 2008 to 2024 (2024 is my estimate), as well as fed remittances to the Treasury as shown in the Fed's Financials (more on this later).
As the Table Shows, Federal Reserve only Income was substantially negative in 2023 and 2024, with a combined net loss in these two years of almost $ 200 billion.
At first glance one might think that this table suggests the Treasury remitted almost $ 200 billion to the federal reserve over the last two years. That is not, however, the case. If the Federal Reserve Books A Net loss, then it “books” a negative remittance to the treasury but it also “books” an increase in its “deferred asset – remittance to treasury.” This deferred asset reflects the fact that the treasury does not in fact remit any funds to the fed when the fed books a loss. Rather, the deferred asset balance reflects the amount of positive just income the fed would earn in the future without remitting any funds to the Treasury. For example, if this deferred asset Balance were $ 200 billion and over the next four years the Fed's just Income Totaled $ 200 billion, then the Fed would not remit any funds to the Treasury over those four years.
Weekly data on this deferred asset balance is from the fed's H4.1 release, and is available in the Fred Database. Here is a chart from 9/7/22 to 2/26/25.
If or 2/26/2025, the Fed's “Deferred Asset -Remittance to Treasury was -$ 223.98 billion. Notes that (1) This balance has continued to grow in the first 8 weeks of this year, sighing that fed only income was still negative over this period; and (2) the growth in the negative balance has slowed, sighs that only loses are shrinking. This of course is not surprising, as the funds rate is 100 base points lower now than prior to mid-September of last year.
Trying to predict fed just income over the next year of two dependents very heavily on projections of the federal funds rate, and depends somewhat on the pace of balance sheet reduction and the Fed's reinvestment strategy. However, it is highly likely that the fed will not be remitting any funds to treasury anytime soon.
Chart of the Day: When will quantitative tightening start?
Data through 2/26/2025