The Supreme Court may have ruled that the funding structure for the Consumer Financial Protection Bureau is constitutional, but a pair of thought leaders on risk and capital markets have published an essay wondering whether the Federal Reserve Board should be allowed to continue funding the Bureau because its appropriations are supposed to be drawn from the “earnings of the Federal Reserve System.” The problem? The Fed isn’t making money these days and thus has no earnings.
Since September 2022, the Federal Reserve has accumulated over $170 billion in operating losses and continues to lose more than $1 billion each week, according to the essay, written by fellows from the American Enterprise Institute. These losses have exhausted the Fed’s retained earnings and paid-in equity capital, forcing it to borrow to cover its expenses, including those of the CFPB.
The Supreme Court’s decision hinges on the interpretation that the CFPB’s funding constitutes an appropriation made by law, as it is drawn from the Treasury. However, the Federal Reserve’s current financial state means there are no earnings to distribute, and the funds transferred to the CFPB are not “public money” as defined by the Federal Reserve Act. This discrepancy suggests that the CFPB’s funding mechanism may not align with legal requirements.
The Federal Reserve has three borrowing options to cover its losses and fund the CFPB: issuing new Federal Reserve Notes, increasing deposits at Federal Reserve district banks, or borrowing from financial markets. Of these, only Federal Reserve Notes are guaranteed by the U.S. government and can be considered public money. The other methods rely on the creditworthiness of the Federal Reserve Banks, many of which are technically insolvent.
“In sum, the Supreme Court’s recent ruling notwithstanding, the CFPB’s funding mechanism currently conflicts with the clear language of both the Dodd-Frank Act and Federal Reserve Act,” the authors write. “As long as the Fed continues to suffer operating losses, the CFPB is not being funded with Federal Reserve earnings, and to the extent that the CFPB is not being fully funded with newly issued Federal Reserve Notes— and it is not — the CFPB is not being funded by ‘public money drawn from the Treasury.’ “
