Federal Reserve Reports Record Loss in 2023
In a recent announcement, the Federal Reserve disclosed a net negative income of $114.3 billion for the year 2023. This figure stands in stark contrast to the $58.8 billion in net income reported in 2022 and represents the highest loss on record for the US central bank. The audited figures confirm preliminary reports released earlier in the year.
Despite this significant loss, the Federal Reserve has assured that its capacity to function and execute monetary policy remains unaffected. Traditionally, the Fed’s profits, after operational costs are deducted, are transferred to the Treasury. These profits are derived from the financial services provided by the Fed and the interest accrued on its securities holdings, which have been substantial in years of low rates and considerable bond holdings.
The aggressive interest rate hikes that began in spring 2022 have dramatically altered the financial landscape of the central bank. In efforts to mitigate inflation, the federal funds rate target was increased from near zero to a range between 5.25 percent and 5.5 percent. Consequently, the Fed has had to pay higher interest rates to banks and other financial institutions for parking their cash reserves with the central bank.
Interest expenses soared to $176.8 billion in 2023, a significant jump from $116.4 billion in 2022. Similarly, payouts from the reverse repo facility climbed to $104.3 billion from $41.9 billion in the previous year. However, income from bond holdings remained relatively stable at $163.8 billion.
The Fed has mechanisms in place to handle operating losses, such as creating money for its operations and recording losses as a deferred asset on its balance sheet. By the end of 2023, this deferred asset reached $133.3 billion and had increased to $157.8 billion by March 20, with future projections remaining uncertain.
Once profitability is restored, the Federal Reserve plans to use surplus earnings to reduce the deferred asset balance. After it is fully amortized, the Fed will resume transferring excess profits back to the Treasury. Although it may take years before the Fed can start returning profits to the government again, officials highlight that substantial amounts have been remitted in recent years, according to a report from the St. Louis Fed.