The cost of high interest rates? The Federal Reserve has incurred losses for three consecutive years, with total losses exceeding $200 billion.

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

On Wednesday, March 25th, the Fed released its audited financial statements for 2025, showing a $18.7 billion operating loss last year. This figure is significantly lower than the losses in the previous two years—$114.3 billion in 2023 and $77.6 billion in 2024.

The Fed’s profit and loss logic mainly depends on earning interest income from holding U.S. Treasuries and mortgage-backed securities on the asset side, while paying interest on reserves deposited by commercial banks on the liability side. When the interest paid exceeds the income earned, operating losses occur.

Since 2022, the Fed has sharply raised interest rates to curb high inflation, causing the interest paid on bank reserves to consistently surpass its income from bond investments. Currently, the Fed pays 3.65% interest on approximately $3 trillion in reserves, down from 4.4% on $3.4 trillion reserves a year ago.

The ongoing losses have caused the Fed’s “deferred assets” to grow from $216 billion in 2024 to $243.5 billion in 2025. A forecast by the New York Fed last year indicated that the Fed could return to profitability this year and potentially clear its deferred assets by 2030.

It’s important to note that these losses do not affect the Fed’s daily operations. The institution does not need to seek appropriations from Congress nor rely on Treasury Department funding. Once profitable in the future, it will prioritize repaying the deferred assets before remitting profits to the U.S. Treasury.

Deferred Assets: A Self-Compensating Mechanism

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

In 2022, the Fed established an internal mechanism called “Deferred Assets,” which is essentially a self-issued IOU.

When the Fed’s expenses exceed its income, resulting in a net loss, it cannot record negative net assets or carry losses forward to equity like commercial banks because, as a central bank, it lacks a typical corporate capital structure.

Instead, it uses a unique accounting method to record the loss as a “Deferred Asset.” This “Deferred Asset” essentially represents past losses that will need to be offset by future profits.

It is not a real asset but an accounting expedient used to balance the balance sheet and ensure the Fed’s continued operation within the legal framework.

Under current arrangements, the Fed will first use future profits to repay this deferred asset. Once it is fully cleared, the usual practice of remitting profits to the Treasury will resume.

Until then, the Fed has long been a significant “contributor” to the Treasury. From 2012 to 2021, the Fed paid over $870 billion to the Treasury, with $109 billion in 2021 alone.

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