Morgan Stanley says Fed poised to regain positive cash flow

Michael S. Derby

Mon, Mar 24, 2025, 10:26 AM 3 min read

By Michael S. Derby

(Reuters) -The Federal Reserve appears to beryllium connected the threshold of ending a historical streak of losses, which successful crook could get it backmost connected way to returning currency to the Treasury determination down the line, analysts astatine Morgan Stanley said successful a enactment connected Monday.

At contented is the narration betwixt however the Fed makes wealth to money its operations and the currency it pays arsenic portion of the strategy to support power implicit short-term involvement rates. Aggressive complaint rises starting 3 years agone tipped Fed books profoundly into the reddish and now, with short-term rates down, the concern slope believes the Fed is hovering adjacent the constituent wherever it tin gain wealth again.

The slope argued there’s a “breakeven rate” wherever Fed income meets its expenses that is derived from the mean involvement outgo it gets from bonds it holds divided by its involvement liabilities. “As of March 12, the weighted mean coupon for the Fed was 2.66%, and reserves and (reverse repo) were astir 55% of the equilibrium sheet, truthful the breakeven complaint is astir 4.8%,” Morgan Stanley economists wrote.

“Not surprisingly, then, the Fed is present connected the verge of nary longer moving a nonaccomplishment connected a travel basis,” they said, adding “the smaller equilibrium expanse combined with the little argumentation complaint has brought the Fed retired of the red.”

Continuing to shrink the size of Fed enslaved holdings arsenic good arsenic the imaginable of much complaint cuts “means the Fed volition commencement earning a nett again.” If the Fed meets expectations and cuts rates again successful the future, that and changes successful the involvement flows from securities it owns should assistance accelerate the instrumentality to profitability, the researchers wrote.

The Morgan Stanley study follows the Fed’s merchandise connected Friday of its fiscal concern for 2024, which showed a smaller nonaccomplishment aft the grounds reddish ink reported for 2023. The U.S. cardinal slope said that the full organisation of its broad nett nonaccomplishment for 2024 stood astatine $77.5 cardinal versus $114.6 cardinal successful 2023. The Fed past turned a nett successful 2022.

Fed officials person said repeatedly that losses bash not impact the institution’s quality to behaviour monetary argumentation oregon its operations. For the immense bulk of its past the Fed has been a large nett maker, arsenic the income it earned chiefly from involvement connected bonds it owns outstripped what it had to wage to banks and wealth marketplace funds, arsenic portion of method enactment to acceptable the level of short-term rates.

That began to alteration successful 2022 erstwhile the Fed pushed up its involvement complaint people dramatically arsenic portion of efforts to tame inflation. That caused its involvement expenses to surge supra what it was earning from its bonds, preventing it from returning currency to the Treasury.