Federal Reserve Losses and Monetary Policy
Published by the American Enterprise Institute with Paul H. Kupiec.
Past monetary policy decisions have resulted in the Fed suffering more than $140 billion in accumulated cash losses in addition to $1 trillion in unrealized losses on its securities portfolio. The Fed System and the majority of Reserve Banks are technically insolvent on a GAAP basis. Fed officials claim that the Fed’s losses and negative GAAP capital do not compromise its ability to conduct monetary policy because the Fed can create money to cover its losses, however large the losses may become. The Fed’s narrative leaves out important details including that the Fed’s ability to print paper currency is limited by law and deposits held at insolvent Reserve Banks are unsecured liabilities that are legally at risk because they lack a federal government guarantee. We calculate the GAAP capital of each Reserve Bank and the System, and estimate depositors’ loss exposures under current law. We review the current legal framework in place for addressing insolvent Reserve Banks. We conclude that the framework will be ignored, and the Fed will continue to operate at a loss while deeply technically insolvent as long as depositors maintain their belief that Fed deposits are protected by an implicit federal government guarantee. Congressional action may be needed should this confidence waiver.