Douglas RissingThe Fed is in great difficulty. The institution is part of the government, as defined by the Federal Reserve Act of 1913, but its typical role as the supervisor of banks and banking regulations has, for years, also provided money to the U.S. Treasury from the profits that it makes. Now, the profits have not only diminished but totally disappeared, which means that the U.S. government no longer receives money from the Fed, causing an even larger debt for the federal government. Let me tell you, regardless of some of the comments in the Press that everything is just fine, it is not!
Here are the facts. In 2023, the Federal Reserve spent $114.3 billion more than it generated, according to the Fed’s records. This is its largest operating loss on record. This is compared to 2022, when the central bank brought in a net income of $58.8 billion and then distributed its profits to the US. Treasury.
In its battle with inflation, as part of the Federal Reserve’s increases to the key rate, the bank had to shell out $60 billion more in interest on depository institutions’ reserve balances compared to the year before. And in the same period, it incurred an additional $62.4 billion in interest on securities sold under agreements to repurchase. Once again, the war with inflation has a very negative effect. The cost of borrowing money has just spiraled out of control.
The Fed’s audited financial statements revealed interest payments to banks on excess reserves parked at the Fed hit a record $176.8 billion last year – almost triple the amount paid in 2022. Interest payouts from the reverse repo facility also swelled from $41.9 billion to $104.3 billion last year.
When there’s a shortfall in earnings, the Fed uses a deferred asset – which essentially works as an IOU paid by the Fed to itself – to fund operations. So, when the central bank becomes profitable once more, it can divert the excess earnings to pay down the deferred asset until it reaches zero.
Once the deferred asset is fully paid off, the Fed can continue to hand excess profits over to the Treasury again. However, a November report from the St. Louis Fed estimates the central bank will carry this deferred asset until mid-2027, which means it’ll be a few years before it can return profits to the government or, translated, several years ahead of adding to the government’s budget deficit. This is almost never mentioned in the Press or calculated in the government’s deficit, but it is there nonetheless.
This will also have a continuing impact upon both the bond and equity markets, as our Gross Domestic Product (GDP) is nowhere close to the country’s debt. According to the St. Louis Fed, at the end of 2023, the debt-to-GDP ratio stood at 120.57%. In my opinion, that is one scary number and something we should all consider when investing, especially because the situation may only get worse, depending upon the actions of the government.
Even now, according to MSN, the average interest rate for credit cards is 21.47% at the start of 2024. Rates have been steadily increasing in recent years, and dramatically so. In November 2021, the average rate for credit cards was 14.51%, and back in November 2017, for example, it was 13.16%.
Lower inflation will help the economy and the markets. Higher interest rates will have an adverse effect. My advice is to keep your eyes on both.
Shared by Golden State Mint on GoldenStateMint.com
