The Federal Reserve is on pace to lose somewhere in the neighborhood of $100 billion over the next year to eighteen months, as the yield on its portfolio of Treasurys and mortgage-backed securities is now being surpassed by the interest it pays banks to hold reserves in their accounts at the Federal Reserve (this practice began in response to the 2007–08 financial crisis as an enhanced means of controlling liquidity). For the past decade, the Federal Reserve's ultralow interest rate policies meant it could hoover up plenty of debt, to the tune of $8 trillion, and still send a reasonable return to the Treasury at the end of each fiscal year.
Hey, this may be crazy, but at least it's paying for itself, right?
With the federal funds rate now rising at an historically unprecedented clip, the Federal Reserve's portfolio will be in the red for the foreseeable future. And depending on whether the Federal Reserve is able to keep to its projected peak federal funds rate over the coming year, a questionable proposition by Jerome Powell's own admission on Wednesday, that current projected loss could grow significantly, creating an unknown liability on the Fed's balance sheet in coming years. While the Fed will simply recategorize the now negative cash flow as a "deferred asset," the fact that its portfolio is no longer producing a return has multiple consequences.