- [Narrator] In some ways, the Federal Reserve
is like a company.
It has a balance sheet with assets
that bring in money on one side
and liabilities that cost money on the other.
But what the Fed keeps on its balance sheet
has ramifications for the economy.
- The balance sheet is the tool that they use
to control and manage interest rates.
- [Narrator] And for the last 15 or so years,
the Federal Reserve has actually made money
off of this balance sheet... until today.
Thanks to, well, the Fed's own policies.
- They're losing money
because they're raising interest rates a lot.
- [Narrator] Here's how the Fed makes money
and why they're not now.
This is what their balance sheet looks like.
On the asset side,
they have US treasury securities like bonds.
They're considered really stable, low-risk investments.
And the Fed buys them, sometimes, a lot of them,
to help stabilize the economy.
- The point of it is to bring down
longer-term interest rates,
so if more people are purchasing these securities,
in this case the Fed,
that's gonna drive down the interest rate,
there's more demand for the bond.
- [Narrator] And the Fed purchases
mortgage-backed securities too,
which are what they sound like.
When they invest in them,
they're basically investing in people's mortgages.
- If you have a 2.5% mortgage rate,
that was in part because the Fed
was buying mortgage-backed securities during the pandemic.
- [Narrator] So that's the asset side,
which totals nearly $9 trillion.
On the liability side, the Federal Reserve has literally
all of the currency in circulation.
It's why all money has Federal Reserve Note written on it.
It's a liability of the Fed, the US Central Bank.
The Fed is also a bank for other banks,
and their main liability is reserves of money
that other banks keep at the Fed.
It's another way they can influence the economy.
- There's some concern that if you had
all of this money out there,
you could have even more inflation,
you could have economic effects that you don't intend.
So one of the ways to prevent that money from spurring
even more demand is to have banks hold it at the Fed,
and the Fed controls interest rates
by setting the rate of interest on those reserves.
- [Narrator] When the Fed raises
interest rates on these reserves,
it affects other markets, from bank loans to mortgages.
But really, it means the Federal Reserve
has to pay more in interest to those banks.
For years, that amount was really low, usually below 1%.
Yet, the Fed's assets, on average, paid 2.3% in interest.
So the Fed's assets were bringing in
more interest than its liabilities were costing.
The Fed was actually turning a profit,
and it would send that profit to the US Treasury.
In the last 11 years, this profit would range
from about 4 to $12 billion a month.
- The money that the Fed sends to the Treasury
means the Treasury doesn't have to raise
as much money in the private market.
It means the borrowing needs
of the US government are smaller,
it means deficits are lower than they would otherwise be.
- [Narrator] But now that the Federal Reserve
is raising interest rates, that profit is now a loss.
- They are raising interest rates so much
that they're gonna pay more out than they take in.
- [Narrator] This idea of the Fed even having a profit
or loss is a relatively new one.
Before 2008, the Fed's balance sheet looked like this,
about $1 trillion in assets and liabilities,
mainly treasury securities
to cover the currency in circulation.
But then, the 2008 financial crisis hit.
They dropped interest rates to zero,
but wanted to do even more,
so they bought treasury and mortgage-backed securities
to push interest rates down even further.
That began a decade of growth of the Fed's balance sheet
as interest rates stayed low
and the Central Bank utilized these assets
and liabilities to influence the economy.
Although they tried to shrink the balance sheet at times...
- The plan was never to permanently
expand the balance sheet.
Then COVID comes,
and there was a financial panic in March, 2020.
And they bought just an enormous, staggering amount
of treasury securities and mortgage-backed securities.
- [Narrator] So with a large balance sheet
comes large profits, but now also large losses.
- So, when the Fed loses money, what happens?
They create basically an IOU where they will pay back later
the money that they're losing now,
they call this a deferred asset.
- [Narrator] Basically, they'll pay themselves back later.
The Treasury will have less money,
which means they'll have to take
on more debt to add to the deficit.
But for the Federal Reserve,
experts say it shouldn't change their day-to-day operations,
and they're not too worried about it.
- The Fed's pretty clear, their goals are to achieve
low and stable inflation and strong employment.
It doesn't say anything anywhere that they're supposed
to make a lot of money for the US government.
And so, that's how they're treating this right now.
- [Narrator] Now that the Fed has accumulated
such a large balance sheet to manage the economy,
it must manage not just its gains, but also it's losses.
(gentle music)