Summary of "Why the Fed Could Lose $1.5 Trillion" – The Indicator from Planet Money

Release Date: July 31, 2025
Hosted by NPR's The Indicator from Planet Money

Introduction

In the July 31, 2025 episode of The Indicator from Planet Money, hosts Darian Woods and Alexi Horowitz Ghazi delve into a pressing economic issue: the Federal Reserve's substantial financial losses amounting to an estimated $1.5 trillion. This episode explores the origins of these losses, the Fed's pandemic-era policies, and the ensuing political and economic ramifications.

The Fed's Pandemic Response

The episode begins by contextualizing the Federal Reserve's actions during the COVID-19 pandemic. As the economy teetered on the brink, the Fed, under the leadership of then-Chair Loretta Mester, implemented aggressive measures to stabilize financial markets and support economic activity.

Loretta Mester (03:33): "It was a lot of uncertainty. You come together with your colleagues and share views on the economy, your best analysis, and then set interest rates to try to get the economy working well."

To mitigate the economic downturn, the Fed slashed interest rates to near-zero levels, encouraging borrowing and spending. However, as these measures proved insufficient, the Fed resorted to quantitative easing (QE), purchasing trillions in long-term Treasury bonds and mortgages to inject liquidity into the system.

Loretta Mester (04:42): "The purchases were done to really add monetary accommodation so again that the economy could recover from that really unprecedented, dire event."

Financial Implications: The $1.5 Trillion Loss

While QE was instrumental in averting a deeper recession, it came with significant financial consequences for the Fed. The episode highlights how the Fed's strategy, while initially effective, led to unprecedented losses.

Andrew Levin (07:47): "Andrew is the one who calculated the Fed will lose a total of $1.5 trillion altogether."

The core of the issue lies in the Fed's vast portfolio expansion from June 2020 to March 2022. By purchasing long-term securities at low-interest rates, the Fed locked in low returns. As market interest rates rose post-pandemic, the existing bonds' values plummeted, resulting in significant unrealized losses.

Furthermore, the Fed is obligated to pay interest on the money it created to purchase these assets. While initially manageable due to near-zero rates, rising rates have exacerbated the financial strain.

Andrew Levin (05:25): "It owes interest on that overnight, okay, every single night."

By 2023 and 2024, the Fed reported losses exceeding $100 billion each year, a stark contrast to its usual earnings. These losses are projected to accumulate to $1.5 trillion, burdening taxpayers as the Fed cannot remain loss-making indefinitely.

Perspectives: Support and Criticism

The episode presents a balanced view by featuring both supporters and critics of the Fed's actions.

Supportive Viewpoint: Loretta Mester defends the quantitative easing measures, arguing that they were essential in preventing a more severe economic downturn.

Loretta Mester (09:54): "I think the economy would have been a lot worse off without the quantitative easing. In fact, she believes it helped the US avoid a depression."

She emphasizes the importance of the Fed's independence in making such critical decisions without political interference, highlighting the necessity of using all available monetary tools to steer the economy.

Loretta Mester (09:01): "I think it's very important that there is an independent monetary policy function."

Critical Viewpoint: Economist Andrew Levin critiques the Fed's prolonged QE program, suggesting that the additional stimulus was unnecessary and contributed to inflationary pressures. He likens the Fed's strategy to credit card companies offering zero-interest periods that lead to financial strain when rates increase.

Andrew Levin (06:31): "It's like 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%. ... You got to pay this credit card back over a long period at a much higher interest rate."

Levin contends that the Fed's actions have tied it into a costly financial arrangement that may have long-term negative implications for the economy.

Political Context: Targeting the Fed

The episode also touches upon the political backlash against the Federal Reserve, particularly from Republican lawmakers aiming to discredit Chairman Jerome Powell amid these financial losses.

Darian Woods (00:14): "You might have seen the video last week of Donald Trump and the chair of the Federal Reserve, Jerome Powell, sauntering around a building site."

These political maneuvers are portrayed as tactics to challenge the Fed's credibility and policies, especially concerning interest rate decisions aimed at controlling inflation.

Accountability and Transparency

A significant discussion revolves around the need for the Fed to balance its independence with accountability. While Loretta Mester advocates for the Fed's autonomous use of monetary tools, she also acknowledges the necessity for greater transparency.

Loretta Mester (09:16): "Transparency is part of being accountable for your decisions. And I am a big advocate of the Fed being accountable."

The hosts and guests agree that while the Fed should retain its independent stance to make unbiased economic decisions, enhancing communication and transparency with both the public and lawmakers is crucial for maintaining trust and accountability.

Conclusion: The Broader Impact on the Economy

The episode concludes by reflecting on the broader economic implications of the Fed's $1.5 trillion loss. While the immediate concern revolves around financial losses and political scrutiny, the long-term effects may include tighter monetary policy, potential increases in borrowing costs, and a reevaluation of the Fed's crisis management strategies.

Darian Woods (10:34): "I think this is one of those cases...The lower the stakes, the bigger the controversy."

The discussion underscores the complexity of balancing economic stabilization with fiscal responsibility, highlighting the intricate interplay between monetary policy, political oversight, and economic health.

Produced by Angel Carreras with engineering by Jimmy Keeley. Fact-checked by Cerro Juarez. Edited by Cake and Cannon. The Indicator is a production of NPR.