Macro Musings with David Beckworth Paul Kupiec on Problems with the Fed’s Balance Sheet and Calls to End Interest on Reserves
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Jul 28, 2025 Paul Kupiec, a senior fellow at the American Enterprise Institute and former expert at the FDIC and the Fed, shares his insights on the Fed's balance sheet challenges. He discusses the substantial insolvency of the Fed and explores theories for rectifying this financial quagmire. Kupiec also delves into Ted Cruz's controversial proposal to end interest on reserves, and the implications of the Fed's unique accounting methods. His experience in finance provides a compelling backdrop to this critical analysis of current monetary policy.
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Paul Kupiec's Career Journey
- Paul Kupiec shared his career journey from academia to the Federal Reserve, Wall Street, IMF, and think tanks.
- He emphasized his role in economic research and risk management through these varied experiences.
Fed's Technical Insolvency Explained
- The Fed's balance sheet was about $6.7 trillion as of June 2025, with cumulative cash losses of $232 billion.
- Many of the regional Fed banks are technically insolvent due to these losses exceeding their capital.
Fed's SOMA Portfolio Allocation
- Allocation of the Fed's SOMA portfolio to regional banks depends on a yearly true-up involving Federal Reserve notes and gold certificates.
- This process determines how much of the portfolio each regional bank manages and thus their exposure to gains or losses.
