We all know about the problems the Federal Reserve is having these days trying to hold the U.S. and world financial systems together in the aftermath of the Silicon Valley Bank collapse .
But let me tell you about another problem the Fed has that doesn't involve the world financial system—but is still serious.
The problem, which few people know about, is that the Fed's own income stream has been vaporized by the interest rate increases that it's been imposing for the past year to try to tamp down inflation.
In a wonderful example of irony, those rate increases have caused the Fed to suffer billions of dollars in operating losses .
No, I'm not talking about the decline in the market value of the bonds and other assets that the Fed owns. I'm talking about the Fed having to send more money out the door than is coming in.
Those operating losses mean that the U.S. Treasury is going to be shorted by the billions of dollars of Fed profits that it had been getting for years. And it also means that by extension, U.S. taxpayers will come up short, too.
Let me tell you why.
Under the Federal Reserve's rules, all 12 of its regional Fed banks send essentially all their weekly profits to the Treasury, which commingles those Fed remittances, as they're known, with the money that flows in from taxes and other sources.
As you can see from the accompanying chart, the Fed banks' remittances to the Treasury have been tens of billions of dollars annually for each of the last 10 years. That money has reduced federal budget deficits, which in turn has reduced the amount that the Treasury has had to borrow to pay its bills, and thus has put a bit of downward pressure on interest rates.
This year, however, the banks sent only a relatively paltry $55 million to the Treasury in January and February—and seem unlikely to send much (if anything) more to the Treasury any time soon.
According to Stephen Church of Piscataqua Research, the person who brought this matter to my attention, it's because interest rates have risen rapidly on the $5 trillion-plus that the Fed owes to financial institutions and money market mutual funds.
Those obligations are the result of the "quantitative easing" the Fed did when it pumped money into the financial system to offset the economic problems caused by Covid.
Those $5 trillion of Fed borrowings, which keep that money from flooding the financial market and driving down rates, carry interest at short-term Treasury rates, which were barely above zero for much of last year but are now in the 4% to 5% range.
However, because the Fed has been shrinking its own securities portfolio to begin unwinding quantitative easing , its 12 member banks aren't adding much in the way of new, higher-paying securities to the asset side of their balance sheets.
This means that the banks' interest bills will almost certainly stay higher than their interest income will. Under the rules that govern such things, a regional Fed bank that has suffered net losses must make up those losses before it can start remitting profits to the Treasury again. That's why the $55 million of remittances this year, puny as the amount is relative to what the banks sent in previous years, were sort of surprising.
In a January news release , the Fed said that as of last September, most of its 12 regional banks had stopped sending weekly money to the Treasury and that the banks had run up combined losses (which the Fed called "a deferred asset") totaling $18.8 billion at year-end.
Some of the regional banks, however, were still able to send money to the Treasury this year—hence the $55 million that the Treasury got in January and February.
Now, however, the Fed banks collectively are more deeply underwater than they were at the start of this year. None had remitted anything to the Treasury this month, when last I checked, and it's not clear when—or whether—some of them will make enough profits to cover their accumulated losses and start remitting money to the Treasury again this year.
According to Church, the 12 banks' total cumulative losses totaled $38.2 billion as of Mar. 1, and were rising at the rate of about $3 billion a week.
Since I don't have numbers for each regional Fed, I suppose it's possible that some of them have relatively modest accumulated deficits and may be able to make up those losses and send the Treasury a few bucks this year.
However, barring some sort of divine financial intervention, I can't imagine the Fed banks sending the Treasury anything remotely comparable to the billions of bucks they've sent in previous years.
I asked the Fed and the Treasury to discuss this with me, but they both declined to do so.
At some point, I'm sure, this situation will reverse itself because nothing in the financial world is forever. And the Fed, for reasons we can discuss another time, has endless financial staying power.
This means that someday, the regional Feds will make enough to recoup their losses and begin sending substantial sums to the Treasury again.
But I sure wouldn't hold my breath waiting for that to happen.
Allan Sloan is an independent business journalist and seven-time winner of the Loeb Award, business journalism's highest honor.