Daily Spotlight: Fed Finds Profits ElusiveThe Federal Reserve has an impact on financial markets beyond the direction of short-term interest rates, including an influence on longer-term bond yields and the federal deficit. The Fed recently released its Statement of Operations for 2023 and reported interest income of $175 billion and $1 billion in other income, versus $281 billion in interest expense and $9 billion in operating expense. That's a loss of $114 billion, which adds to the U.S. deficit. The Fed is losing money right now because it earns approximately 2.2% in its securities portfolio and pays out approximately 5.2% for repurchase agreements and excess bank reserves. It may be quite a while before the Fed is able to return to profitable operations In the aftermath of its quantitative easing program to boost the economy during the pandemic, the Fed's balance sheet ballooned from $4 trillion to just shy of $9 trillion in 2022. For the past two years, the central bank has been reducing its asset levels by allowing $60 billion in Treasury securities to mature and $35 billion in mortgage-backed securities to run off each month. This "quantitative tightening" increases the supply of bonds available in the market, but has reduced the Fed's assets to $7.5 trillion. We anticipate the Fed will lower its monthly Treasury cap to $30-$40 billion, reinvesting the remainder into the market at higher rates. Over time, as balance sheet shrinks, the Fed's annual loss should decrease. The central bank certainly has a long way to go, if it ever wants to shrink the balance sheet back to the pre-pandemic crisis level.