Why the Fed could lose $1.5 trillion

Summary

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

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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.

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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.

Transcript

[Alexi Horowitz Ghazi]

Npr.

[Darian Woods]

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.

[Andrew Levin]

We're looking at the construction.

[Alexi Horowitz Ghazi]

They're touring the Federal Reserve buildings mid renovation. These buildings have been a target by Republicans trying to oust Jerome Powell, which explains, explains some of the awkward moments.

[Andrew Levin]

So the 2.7 is now 3.1. I'm not aware of that.

[Darian Woods]

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

[Andrew Levin]

You just added in a third building is what that is. That's a third building. It's a building that's being built. No, it's been. It was built five years ago. We finished Martin five years now.

[Alexi Horowitz Ghazi]

It is no secret that this whole commotion is simply politics. The president or Congress cannot fire the Fed chair because they disagree that the central bank's interest rates are too high. Just yesterday, Jerome Powell announced interest rates remained above 4% to keep inflation under control. So several Republican lawmakers are grilling the Fed chair on something that could smell like mismanagement, renovation cost overruns, even if cost overruns are very common.

[Darian Woods]

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 1 1/2 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.

[Alexi Horowitz Ghazi]

And I'm Alexi Horowitz Ghazi. Today on the show, the other enormous cost overruns at the Fed, we talked to a critic and one woman who helped make those decisions. We who says those actions have paid for themselves through a stronger economy.

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[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.

[Alexi Horowitz Ghazi]

Yeah, we can almost forget, but in those early days, so many people were losing their jobs, businesses were closing, and the markets were freaking out. Loretta Mester was the head of the Federal Reserve bank of Cleveland during this time, which meant she was responsible for voting on how the Fed reacted to it was unprecedented.

[Loretta Mester]

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.

[Alexi Horowitz Ghazi]

The Fed slashed interest rates to basically zero so that people could borrow a lot, spend a lot, and keep the economy afloat.

[Darian Woods]

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 give people and businesses the confidence to borrow even more.

[Loretta Mester]

The purchases were done to really add monetary accommodation so again that the economy could recover from that really unprecedented, dire event.

[Alexi Horowitz Ghazi]

Where did the money come from for the Fed to do the quantitative easing to buy all those treasury bonds and mortgages? Well, it kind of created the money out of thin air and bought those bonds from places like maybe your bank. But just because the Fed created the money at the stroke of a keyboard doesn't mean that quantitative easing was costless.

[Darian Woods]

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

[Andrew Levin]

It owes interest on that overnight, okay, every single night.

[Darian Woods]

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

[Andrew Levin]

Because, yeah, it looks like a good deal because The Fed's issuing IOUs that pay almost no interest. And it's using those to buy treasury notes and other securities that are paying 1%. And it looks like a good deal.

[Darian Woods]

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 in that point in time.

[Andrew Levin]

Oh, it's a great analogy. So there are a lot of credit cards that have a teaser rate. So like for the first six months or 12 months, it's zero interest. It looks like a great deal. Oh, honey, let's go on that vacation we wanted to do. Okay. But then at the end of the year, suddenly the interest rate goes up much, much higher. And now you're kind of stuck because you got to figure out, okay, well this year we're not going to be able to buy Christmas presents for the kids because we got to make all those payments on those credit cards.

[Alexi Horowitz Ghazi]

To make matters worse, those 5 and 10 and 20 year treasury bonds the Fed held weren't worth as much anymore. Why would someone want to buy those bonds that gave you, I don't know, 1 or 2% interest when you could buy newer treasury bonds and get 5%?

[Andrew Levin]

They're going to be on the Fed's books for a long time. Okay? So again, if we use the credit card analogy that you mentioned before, it's like you got to pay this credit card back over a long period of time at a much higher interest rate. Okay. And you start thinking, boy, did we. Was that vacation we took for one week really worth it.

[Darian Woods]

In normal times, the Fed makes money. It sells dollar bills, $10 bills, $100 bills to banks and 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.

[Alexi Horowitz Ghazi]

Ouch.

[Darian Woods]

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

[Alexi Horowitz Ghazi]

Andrew is the one who calculated the Fed will lose a total of $1.5 trillion altogether.

[Darian Woods]

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.

[Andrew Levin]

Great point. The real issue here is the Federal Reserve kept expanding the size of its portfolio from June of 2020 all the way until March of 2022. And during a lot of that period, the economy was recovering pretty fast and the Fed was still continuing with this program. The Federal Reserve did not consult with Congress about any of this.

[Alexi Horowitz Ghazi]

We asked Loretta Mester about this.

[Darian Woods]

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

[Loretta Mester]

Well, I think of the asset purchases as being part of monetary policy and part of the tools of monetary policy. And I think it's very important that there is an independent monetary policy function.

[Darian Woods]

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

[Loretta Mester]

So I would not support asking permission to use one of the tools of monetary policy. That said, transparency is part of being accountable for your decisions. And I am a big advocate of the Fed being accountable. And I think the chair does do a very good job of explaining the rationale for policy. I do think it can be improved, as anything can be improved. And I certainly have been one of the people who have advocated for more transparency, more communication, you know, explaining to the public the rationale for decisions.

[Darian Woods]

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.

[Alexi Horowitz Ghazi]

The lower the stakes, the bigger the controversy.

[Darian Woods]

I think this is one of those cases. This episode was produced by Angel Carreras with engineering by Jimmy Keeley. It was fact checked by Cerro Juarez. Cake and Cannon edits the show and the indicator is a production of npr.

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