Normally the Federal Reserve makes a profit from its balance sheet, but with higher interest rates it is now in the red. WSJ explains how the Federal Reserve makes money, what it does with it, and what happens now.
By
Wall Street Journal
November 2, 2022
5:04
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The Fed's losses are essentially without precedent in its history. The Fed funds its work through services it provides to the financial sector and from interest income generated by the Treasury and mortgage bonds it owns. Whatever the Fed earns beyond its operating expenses is then returned to the Treasury Department.
It creates money not by printing currency but by effectively adding funds to the money supply. The Fed does this in various ways, including changing the target fed funds rate with the goal of affecting other interest rates. Or it may buy Treasury securities on the open market to add funds to bank reserves.
The Fed uses three primary tools in managing the money supply and pursuing stable economic growth. The tools are (1) reserve requirements, (2) the discount rate, and (3) open market operations. Each of these impacts the money supply in different ways and can be used to contract or expand the economy.
The Federal Reserve System performs five functions to promote the effective operation of the U.S. economy and, more generally, to serve the public interest. It includes three key entities: the Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee.
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