The cost of high interest rates? The Federal Reserve posts losses for three consecutive years, with cumulative losses exceeding $200 billion

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

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

The Federal Reserve's profit and loss logic mainly involves 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 latter exceeds the former, operating losses occur.

Since 2022, the Federal Reserve has raised interest rates sharply to curb high inflation, resulting in the interest paid to banks on reserves continually exceeding its income from bond investments. Currently, the Fed pays a rate of 3.65% on about $3 trillion in reserves, compared to the previous year when it paid 4.4% on $3.4 trillion in reserves.

The continued expansion of losses has increased the Fed's "deferred assets" from $216 billion in 2024 to $243.5 billion in 2025. According to the New York Fed's forecast last year, the Federal Reserve is expected to return to profitability this year and could clear the deferred asset balance before 2030.

It is noteworthy that these losses do not impact the Fed’s daily operations. The institution does not require congressional appropriations, nor does it rely on Treasury injections. Once it returns to profitability, future earnings will be used first to repay the deferred assets, and only then will profits be handed over to the U.S. Treasury.

Deferred assets, a self-replenishing unique mechanism

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

In 2022, the Fed established an internal mechanism called "deferred assets," which is essentially an IOU issued to itself.

When the Federal Reserve’s expenses exceed its income, resulting in a net loss, since it does not have the capital structure of a typical corporation as a central bank, it cannot record “negative net assets” or “losses carried forward to equity” like commercial banks,

Therefore, it uses a unique accounting method by recording the losses as a “deferred asset.” This “deferred asset” actually represents past losses that must be offset by future profits.

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

According to current arrangements, the Fed will use its future profits to first offset this deferred asset. Only after it is fully cleared will the bank resume the practice of remitting profits to the Treasury.

Prior to this, the Federal Reserve was a major “contributor” to the Treasury for an extended period. Between 2012 and 2021, the Fed remitted over $870 billion to the Treasury, including $109 billion in 2021 alone.