The Indicator from Planet Money - Why the Fed could lose $1.5 trillion

Episode Date: July 31, 2025

The Fed is on the hook for an estimated one-and-a-half trillion dollars. Despite the recent headlines, that's not because of building renovations. It's a much larger cost blowout caused by big actions taken during the pandemic to help the economy: quantitative easing. Today on the show, we talk to both a critic of these actions and someone who helped put those those actions in play. See pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences.NPR Privacy Policy

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

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

Now, 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 were made 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.

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 $1.5 trillion. That's how much the Fed is estimated to lose because of its actions during the pandemic. This is the indicator from Planet Money. And I'm Alexei 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, who says those actions have paid for themselves through a stronger economy. The Fed is losing an estimated $1.5 trillion

because of one program it undertook during the pandemic to try to revive the economy. 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. It was unprecedented. 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. The Fed slashed interest rates to basically zero so that people could borrow a lot, spend a lot, and keep the economy afloat. 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 in mortgages and holding onto them. The hope was that this would push down interest rates for five, ten, twenty years into the future, not just in the short term. And that that would give people and businesses the confidence to borrow even more.

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

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. It owes interest on that overnight, okay, every single night. And so when interest is nearly zero in the height of the pandemic,

then that's kind of okay for the Fed because... Yeah, it looks like a good deal because the Fed is, 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. Right. 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 one or two percent. And so you're actually gating it in that point in time. 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've got to figure out, okay, well, this year, we're not going to be able to buy Christmas presents for the kids because we've got to make

all those payments on those credit cards. To make matters worse, those five and ten and 20-year treasury bonds, the fact that that held weren't worth as much anymore. Why would someone want to buy those bonds that gave you, I don't know, one or two percent interest when you could buy newer treasury bonds and get 5 percent? 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're,

you've 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, was that vacation we took for one week really worth it? 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. Ouch. And in 2024, it lost nearly $80 billion. And when the Fed loses money, taxpayers foot the bill. Andrew is the one who calculated the Fed will lose a total of $1.5 trillion altogether. 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 forth. And yet, I don't recall this happening around the times of when the Fed was undergoing these policies to the same extent. 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. We asked Loretta Mester about this.

Do you think that the Fed should either seek permission or be more collaborative, more consultative with Congress on these very large decisions? 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 functions. 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 gusing the economy and causing inflation. So I would not support asking permission to use one of the tools of monetary policy. That said, you know, 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've 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. Loretta says the economy would have been a lot of 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 of harder than explaining the building costs debacle. The lower the stakes, the bigger the controversy. I think this is one of those cases. This episode was produced by Angel Kareadis with engineering by Jimmy Keeley. It was fact-acted by Sierra Juarez. Kakin Cannon edits the show and the indicator is a production of NPR.