The Cost of High Interest Rates? Fed Suffers Losses for Three Consecutive Years, Cumulative Deficit Exceeds $200 Billion

The Federal Reserve has experienced operating losses for the third consecutive year, with cumulative losses exceeding $200 billion.

On Wednesday, March 25, the Federal Reserve released its audited financial statements for 2025, showing that the central bank recorded an operating loss of $18.7 billion last year. This figure is significantly lower than the previous two years, with losses of $114.3 billion in 2023 and $77.6 billion in 2024.

The logic behind the Federal Reserve's profits and losses primarily lies in earning interest income from its holdings of Treasury bonds and mortgage-backed securities on the asset side, while paying interest on reserves held by commercial banks on the liability side. When the latter exceeds the former, operating losses occur.

The Federal Reserve significantly raised interest rates starting in 2022 to curb high inflation, leading to continuous interest payments on bank reserves exceeding its investment income from bonds. Currently, the Fed pays a 3.65% interest rate on approximately $3 trillion in reserves, compared to 4.4% on $3.4 trillion in reserves a year ago.

The widening losses caused the Federal Reserve's "deferred asset" to increase from $216 billion in 2024 to $243.5 billion in 2025. Last year's projections from the New York Fed indicated that the Federal Reserve was expected to return to profitability this year and could eliminate its deferred asset by 2030.

It is worth noting that the aforementioned losses do not affect the Federal Reserve's daily operations. The institution does not need to apply for appropriations from Congress, nor does it rely on the Treasury Department for capital injections. Once it becomes profitable in the future, it will prioritize the repayment of deferred assets before remitting profits to the U.S. Treasury.

Deferred Asset, A Unique Self-Rectifying Mechanism

Unlike other federal agencies, the Federal Reserve does not need to seek financial support from Congress to cover its losses.

In 2022, the Federal Reserve created an internal mechanism called a "deferred asset," which is essentially a self-issued IOU.

When the Federal Reserve's expenses exceed its income, resulting in a net loss, it employs a unique accounting method to record the loss as a "deferred asset." This is because, as a central bank, it does not have the capital structure of a typical corporation and cannot record "negative net assets" or "losses carried forward to equity" like commercial banks.

This "deferred asset" actually represents historical losses that need to be offset by future profits. It is not a true asset but rather an accounting expediency to balance the balance sheet and ensure the Federal Reserve continues to operate within its legal framework.

Under the current arrangement, the Federal Reserve will first use its future profits to repay this deferred asset. Only after it is fully cleared will the practice of remitting profits to the Treasury Department resume.

Prior to this period, the Federal Reserve was a significant "contributor" to the Treasury. From 2012 to 2021, the Federal Reserve remitted over $870 billion to the Treasury, with $109 billion alone in 2021.