Recent New York Fed research shows balance sheet reduction will continue for several years. As a result, it is expected to experience negative net income during this period.
The net income of the Federal Reserve System is the profit made by the Fed for a specific time, generally a year. The Federal Reserve gets money largely through interest on the securities it owns, such as US Government bonds and mortgage-backed securities, as well as from other fees and services it offers to member banks and other financial organizations.
The Fed indicated in its annual report for its System Open Market Account for 2022 that its holdings, which are now at $8.7 trillion, will likely decrease to roughly $6 trillion by the middle of 2025 before stabilizing for about a year.
Holdings are then anticipated to rise to keep pace with economic expansion before declining. Heavy purchases of Treasury bonds along with mortgage bonds, which began in March 2020, more than quadrupled the size of the SOMA, which peaked this summer at just shy of $9 trillion.
The NY Fed report also included predictions of the institution’s net negative income scenario as part of its rate-hiking initiatives.
Raising the federal funds rate goal from near zero to the present 4.75% to 5% range has dramatically raised central bank interest rate costs, which are now outstripping income from services and interest on bonds owned.
While the Fed might still return surplus earnings to the Treasury in 2022, its income became negative late last year. The Fed’s deferred asset was at $46.2 billion as of April 5.
Although the Fed has stated that its losses have no impact on its capacity to execute monetary policy, several experts have expressed concern that the scenario may cause friction with elected officials. The Fed also expects significant use of its reverse repo facility, according to the NY Fed report.
As New York Fed research shows balance sheet reduction will continue for several years, their efforts have been hampered in recent weeks by a rise in banks seeking central bank liquidity in the aftermath of Silicon Valley Bank’s bankruptcy.
Central bankers and experts have warned that the consequent balance-sheet growth from this lending is not stimulating the economy.
Source: Federal Reserve Bank of New York