The Fed Balance Sheet and Income Statement Losses: Why they Matter from a Political Economic Viewpoint

The US Federal Reserve has been incurring income statement losses since September 2022 and now operates in a state of negative net equity. The Fed has taken the position that the losses do not matter to monetary policy making and normal functioning. This paper sets out the reasons for the mounting losses and the Fed positioning in response, covering fundamental issues at stake, including interest paid on reserves to financial institutions, remittances and deferred assets. The analysis demonstrates that the scale and duration of the losses and the creditor relation with Treasury that has resulted pose a major challenge to Fed credibility and independence and raise questions regarding the financial and political sustainability of the Fed stance. Further, the paper presents evidence that the Fed has not been transparent with Congress or the public about the risks and costs of the QE and IOR/ONRRP regime. It suggests this non-transparency might be explained by a fear of loss of credibility that has extended and exacerbated the loss making. Finally, the analysis reveals a fiscal and political cost of Quantitative Easing (QE) that questions its possible use as policy response in future crises.