
The Federal Reserve announced on Tuesday that it experienced a net loss of $114.3 billion in 2023, marking a record-breaking loss due to expenses related to managing the U.S. central bank’s short-term interest rate target. This loss comes after the Fed reported a net income of $58.8 billion in 2022. The figures released are audited totals, following preliminary numbers reported earlier in the year. Despite the negative income, the Federal Reserve has emphasized that it does not hinder its ability to operate or conduct monetary policy.
According to the law, any profits made by the Fed after covering operational expenses are transferred to the Treasury. The Fed generates income through the services it provides to the financial system and from interest earned on the securities it owns. In recent years, the Fed has earned significant profits due to low interest rates and large bond holdings.
The Federal Reserve’s decision to aggressively raise the federal funds rate starting in the spring of 2022 has had a significant impact on its financial situation. In order to curb inflation, the Fed raised the target rate from near zero to the current range of 5.25% to 5.5%. The Fed maintains this target by paying banks, money funds, and other financial institutions to keep their cash at the central bank, resulting in higher interest payouts.
Last year, the audited interest expenses for banks’ reserve balances reached $176.8 billion, an increase of $116.4 billion from the previous year. Additionally, interest payouts from the Fed’s reverse repo facility amounted to $104.3 billion, compared to $41.9 billion the previous year. On the other hand, the income generated from the bonds owned by the Fed remained relatively stable at $163.8 billion last year.
To deal with operating losses, the Federal Reserve has the ability to create money to fund its operations, which means it faces no obstacles in continuing its activities. The loss is accounted for as a deferred asset. At the end of 2023, the official value of the deferred asset was $133.3 billion, and as of March 20, it had increased to $157.8 billion. It is uncertain how much larger this value will become. Once the Fed returns to profitability, it will use excess earnings to reduce the deferred asset. Once the deferred asset is fully extinguished, the Fed will resume returning excess profits to the Treasury.
Federal Reserve officials have acknowledged that they have returned substantial sums of money to the Treasury in recent years. However, a report from the St. Louis Fed last year stated that it could take several years before the Fed is able to once again return profits to the government.