Why the Fed could lose $1.5 trillion

Trump hands Powell a piece of paper explaining why he thinks the Fed renovation costs ballooned to $3.1 billion.

Five years now.

And recently, Republicans like Bernie Morano are criticizing the Fed for something else. They've been losing hundreds of billions of dollars. In fact, the number could be as high as one and a half trillion dollars. That's how much the Fed is estimated to lose because of its actions during the pandemic. This is the indicator from Planet Money. I'm Darian Woods.

The Fed is losing an estimated $1.5 trillion because of one program it undertook during the pandemic to try to revive the economy.

But zero wasn't enough. So the Fed further stimulated the economy with Quantitative easing. What quantitative easing meant was buying up trillions of dollars worth of long term treasury bonds and mortgages and holding onto them. The hope was that this would push down interest rates for 5, 10, 20 years into the future, not just in the short term, and that that would and businesses the confidence to borrow even more.

The Fed still has to pay banks the going interest rate on all the money they created to buy those bonds. Andrew Levin is a professor of economics at Dartmouth College who worked at the Fed for two decades.

And so when interest is nearly zero in the height of the pandemic, then that's kind of okay for the Fed

Right. It's like if your bank, if your bank credit card was interest free and you could use that to put money in a savings account that paid 1 or 2%. And so you're actually gating it at that point in time.

In normal times, the Fed makes money. It sells dollar bills, $10 bills, $100 bills to banks. And it invests the proceeds in treasury bonds, which pays interest to the Fed. That could get The Fed around $100 billion in a typical year. And after deducting its costs, the Fed usually sends that money back to the treasury, which helps pay down the national debt. But not anymore. In 2023, the Fed lost over $100 billion.

And in 2024, it lost nearly $80 billion. And when the Fed loses money, taxpayers foot the bill.

That's a mind boggling amount of money. And this is of the order of these gigantic big budget bills that go through Congress. And we have months of debate and discussion and back and forths, and yet I don't recall this happening around the times of when the Fed was undergoing these policies to the same extent.

Do you think that the Fed should either seek permission or be more collaborative, more consultative with Congress on these very large decisions?

In other words, Loretta sees quantitative easing as part and parcel of decisions like how the Fed raises and lowers interest rates. And interest rate decisions are independent to stop politicians goosing the economy and causing inflation.

Loretta says the economy would have been a lot worse off without the quantitative easing. In fact, she believes it helped the US avoid a depression. And compared to a lot of other countries post pandemic, the US economy was in a relatively good place. Still, based on his research, Andrew Levin believes a lot of the post 2020 actions were unnecessary, costly, and just caused inflation. But where Loretta and Andrew agree is that explaining the quantitative easing program to politicians and the public is a lot harder than explaining the building costs debacle.

I think this is one of those cases. This episode was produced by Angel Carreras with engineering by Jimmy Keeley. It was factorized by Sara Juarez. Cake and Cannon edits the show, and the indicator is a production of NPR.