As part of the
annual report for its System Open Market Account
for 2022, the bank said that Fed holdings, which now stand
at $8.7 trillion, will likely fall to around $6 trillion by the
middle of 2025 before holding steady for around a year. Holdings
are then expected to grow to maintain balance with the growth of
the economy and tick back up to $7.2 trillion by 2030.
As part of an effort to cool inflation with what have
been rapid increases in its short-term rate target, the Fed has
complemented that work with a process begun last summer to
shrink the size of its SOMA holdings.
Aggressive purchases of Treasury and mortgage bonds
kicking off at the onset of the coronavirus pandemic in March
2020 more than doubled the size of the SOMA, which peaked last
summer at just shy of $9 trillion. The Fed is now allowing just
shy of $100 billion per month in bonds it owns to expire and not
be replaced.
The New York Fed report also offered projections of the
net negative income situation the institution faces as part of
its efforts to raise rates. Lifting the federal funds rate
target from near zero levels to the current 4.75% to 5% range
has sharply increased central bank interest rate costs and is
now outstripping the income it earns from services and interest
on bonds it owns.
While the Fed was
still able to hand back excess profits
to the Treasury in 2022, its income turned negative late
last year. The Fed captures this situation with what it calls a
deferred asset, an accounting measure that records the loss
which will then be covered when the Fed returns to
profitability.
"The projections for negative net income suggest that remittances to the U.S. Treasury will be suspended for some time, and that the deferred asset recorded on the Federal Reserve’s balance sheet reflecting the accumulated net loss will continue to grow," the report said.
As of April 5, the Fed's deferred asset stood at $46.2 billion. The Fed has stressed that its losses do not affect its ability to conduct monetary policy, although some analysts have worried the situation could create trouble with elected leaders.
The report also noted that the Fed still expects that
substantial usage of its reverse repo facility
, which has taken in $2 trillion per day or more from money
market funds and other firms for many months, should contract
over time, in part due to money managers gaining greater
certainty over the economic outlook.
The Fed's efforts to reduce the size of its balance sheet have been set back in recent weeks by a surge in banks seeking central bank liquidity in the wake of the failure of Silicon Valley Bank. The Fed extended $323.3 billion in credit
via three of its lending efforts
as of last Wednesday, up from just under $5 billion at the
start of March. But central bankers and analysts have cautioned
that the resulting expansion of the balance sheet due to this
lending is not stimulative to the economy.
(Reporting by Michael S. Derby; Editing by Andrea Ricci)
