How Big Central Bank Gains Can Morph Into Big Losses

The US Federal Reserve and other central banks bought trillions of dollars worth of bonds after the global economy nosedived in the face of the pandemic in 2020. Such so-called quantitative easing (QE) measures not only gave a boost to their economies, but seemingly came at no cost, as the banks conjured the purchase payments out of thin air. At the same time, the bonds that banks added to their balance sheets generated billions of dollars in interest payments to share with their governments. But in an illustration of the adage that there’s no such thing as a free lunch, that revenue flow has not only dried up, but gone into reverse. It’s a switch that isn’t putting central banks in any financial jeopardy but could produce some real political headaches, in Washington and elsewhere.

Usually, the operations of the Fed and similar central banks generate some net earnings, derived from the interest it receives on the bonds and other assets it holds. The Fed then remits those to the Treasury. When its balance sheet swells up from QE, those earnings do too, even though the bonds it was buying were offering very low interest rates. In 2021, the Fed sent $109 billion to the department. But that flow stopped in September 2022, when the Fed’s operations effectively became loss-making. In February 2023, the nonpartisan Congressional Budget Office projected that the Federal Reserve System’s expenses will exceed its income through 2024. Euro-area central banks are facing a similar situation. The European Central Bank only avoided a loss for last year after releasing some of its risk provisions, and the finances of its national counterparts — which implemented much of its bond buying of recent years — also face shortfalls.