by Dismal-Jellyfish

Good afternoon, resident jellyfish here! I hope everyone is enjoying a great Thursday. I want to take a minute to discuss a graph I am sure is going to catch some folks attention pulled from today’s H.4.1 release:

fred.stlouisfed.org/series/RESPPLLOPNWW

Remember, the Fed is playing a bit of a hand here.

Storing losses on the balance sheet as an asset like what is happening above, rather than showing the loss on the income statement right away, is an old corporate accounting trick.

The Fed explains this in a footnote:

The Federal Reserve Banks remit residual net earnings to the US Treasury after providing for the costs of operations, payment of dividends, and the amount necessary to maintain each Federal Reserve Bank’s allotted surplus cap. Positive amounts represent the estimated weekly remittances due to the US Treasury. Negative amounts represent the cumulative deferred asset position, which is incurred during a period when earnings are not sufficient to provide for the cost of operations, payment of dividends, and maintaining surplus. The deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the US Treasury resume.

In other words, each week going forward, the linked chart will show the Fed’s total losses starting from September 2022. The bigger the negative number, the bigger the accumulated loss.

So, what do you mean? This number will get bigger to indicate the amount of money the Fed owes the treasury– -$39,774 million and counting. The Fed gets to just sit on this negative balance and when it starts making money for treasury again (from money it makes on interest and fees, lowering its operating expenses, paying less on dividends), will see that negative number start to shrink (in theory).

However, losses in the six months since September now total More than half of all the earnings the Fed remitted over the entire year of 2022 (-$39.77 billion vs. $76.0 billion all of 2022):

The Federal Reserve Board announced preliminary financial information indicating that the Federal Reserve Banks had estimated net income of $58.4 billion in 2022.

During 2022, Reserve Banks transferred $76.0 billion from weekly earnings to the US Treasuryand, in September 2022, most Reserve Banks suspended weekly remittances to the Treasury and started accumulating a deferred asset, which totaled $18.8 billion by the end of the year.

Again, a deferred asset has no implications for the Federal Reserve’s conduct of monetary policy or its ability to meet its financial obligations.

However, what this will mean for Treasury I am not sure–with the current debt ceiling nonsense seeing Yellen taking extraordinary measures to keep everything afloat through June. You can bet they wish the Fed was sending those weekly earnings while having to navigate this environment.