The Federal Reserve saw a net negative income of $114.3 billion in 2023, a record loss

The Federal Reserve saw a net negative income of $114.3 billion in 2023, a record loss.

Last year, the Federal Reserve reported a loss following a net income of $58.8 billion in 2022, according to audited figures released by the Fed. Despite the loss, the Fed emphasizes that this does not hinder its ability to operate or conduct monetary policy.

By law, the Fed transfers any profits after covering its operational expenses to the Treasury. The Fed generates income from various services it provides to the financial system and from interest earned on securities it holds. In recent years, it has made significant profits due to low interest rates and substantial bond holdings.

However, the Fed's decision to aggressively raise the federal funds rate starting in the spring of 2022 has impacted its finances. To combat inflation, the Fed increased the target rate from near zero to the current range of 5.25% to 5.5%. To maintain this target, the Fed pays banks, money funds, and other financial institutions to keep cash at the central bank, resulting in higher interest payouts.

Last year, the Fed's audited interest expenses for banks' reserve balances amounted to $176.8 billion, a significant increase from the previous year's $116.4 billion. Similarly, interest payouts from its reverse repo facility totaled $104.3 billion last year, up from $41.9 billion the prior year.

Despite these increased expenses, the income the Fed earned from bonds it owns remained relatively stable at $163.8 billion last year, similar to 2022.

The Fed can create money to cover its operating losses, ensuring it can continue to operate smoothly. It accounts for its losses using a deferred asset, which stood at $133.3 billion at the end of 2023 and had risen to $157.8 billion as of March 20. It is uncertain how much larger this deferred asset will become.

When the Fed returns to profitability, it will use excess earnings to reduce the deferred asset. Once the deferred asset is extinguished, the Fed will resume returning excess profits to the Treasury.

Fed officials have acknowledged that it may take years before the Fed can return profits to the government, as substantial sums have been returned to the Treasury in recent years.