After Three Years of Losses, Federal Reserve Signals a Return to Profitability (Image: File)
The Federal Reserve seems to have hit a key financial turning point. New central bank data indicates the Fed has finally ended its unusual run of losses that started in 2022, caused by its large stimulus measures during the COVID-19 pandemic. While the road back to sending profits to the U.S. Treasury is long, the numbers show a clear, if small, shift in direction.
The key indicator is the Fed's "deferred asset," an accounting mechanism that tracks its cumulative losses. After peaking, this number has begun to shrink. From November 5 to November 26, the deferred asset decreased from $243.8 billion to $243.2 billion.
This small reduction signals that the Fed is now generating enough earnings to begin covering its past losses, rather than adding to them. Analysts like Bill Nelson, chief economist at the Bank Policy Institute and a former Fed staffer, estimate the central bank is on track for the 12 regional Reserve Banks to post over $2 billion in combined profit for the current quarter.
For most of its modern history, the Fed has been a steady source of government revenue. It earns income from its vast bond holdings and financial services, returning the excess to the Treasury. This model broke down due to a perfect storm created by its pandemic response.
To stabilize markets and support the economy in 2020-21, the Fed embarked on a bond-buying spree, doubling its holdings to $9 trillion. Then, to combat surging inflation in 2022, it rapidly raised interest rates. This created a costly mismatch: the income from its older, low-yield bonds was suddenly less than what it had to pay banks in interest on their reserves to maintain its new, higher policy rate.
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The primary factor is the Fed's own shift in policy. After aggressively hiking rates to a 23-year high in 2023, the central bank began cutting rates in late 2024. These cuts have reduced the amount the Fed must pay out to banks.
"As market yields begin to move above (the interest rate paid on bank reserves), you would expect that the Fed losses stop and turn around," explained Matthew Luzzetti, chief U.S. economist at Deutsche Bank. Analyst Derek Tang noted the bleeding "stopped at the same time" the key rate was cut in October, indicating an end to the fundamental negative cash flow.
While the loss-making has likely ceased, the recovery will be slow. The Fed must fully erase its $243 billion deferred asset before it can resume payments to the Treasury—a process economists believe will take years. Fed officials consistently state that these accounting losses do not impair their ability to conduct monetary policy. However, the episode has drawn political scrutiny, with some lawmakers criticizing the large interest payments to banks as a subsidy.
A: It is an accounting entry that tracks the total losses the Fed must cover with future profits before it can resume sending money to the U.S. Treasury, as required by law.
A: The data suggests it has stopped operating at a net loss and is generating a small profit. However, all current profit must first go toward reducing the massive $243 billion deferred asset from past losses.
A: The key was the Fed's own interest rate reductions in late 2024. Its biggest expense was decreased by cutting the rate it pays banks, which eventually made bond income sufficient to pay for its expenses.
A: Not for several years. Economists estimate it will take a long period of sustained profits to wipe out the accumulated deferred asset.
A: No. Fed officials maintain that their monetary policy operations are separate from their accounting profits or losses. Their tools remain fully functional.
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