Federal Reserve in the Red: A Historic and Unprecedented Phenomenon
- Nicola Abis
- Nov 4
- 7 min read
Since September 2022, the U.S. Federal Reserve has entered a virtually unprecedented situation in its history: for the first time since 1915, the American central bank has been operating at a loss. This is not an isolated episode, but a condition that has persisted for three years and, according to projections, will continue at least until 2027.
In 2024, the Fed recorded operating losses of $77.6 billion, a partial improvement compared to the $114 billion lost in 2023, but bringing cumulative losses since September 2022 to over $200 billion. Added to this are unrealized losses on securities held in its portfolio amounting to an astronomical $1.06 trillion.
An event that might appear purely accounting-related actually conceals deep and lasting implications for U.S. public finances and, consequently, for taxpayers.
The Origin of the Losses: The Price of Fighting Inflation
The current situation is the direct result of the aggressive monetary policy adopted by the Federal Reserve to combat post-pandemic inflation. Between March 2022 and July 2023, the central bank raised the federal funds rate from 0.25% to 5.5%, aiming to cool demand and bring inflation back toward the 2% target. While necessary, this maneuver created an unusual accounting deficit for the Fed itself — a consequence of the structure of its balance sheet.
The mechanism is relatively simple but has deep roots in past unconventional policies. During the various rounds of quantitative easing (QE), the Fed purchased trillions of dollars’ worth of Treasuries and mortgage-backed securities (MBS), crediting new reserves to banks’ accounts at the Fed in exchange. These reserves — literally created “out of thin air” as the counterpart to the asset purchases — now total several trillions of dollars. Since 2008, and systematically since 2021 with the Interest on Reserve Balances (IORB) tool, the Fed has paid interest on these same reserves to steer market rates.
With rates rising to 5.5%, the cost of this remuneration has exploded: in 2024, the Fed spent $226.8 billion in interest on reserves and overnight reverse repurchase agreements (reverse repos). Meanwhile, its income comes from interest on the securities it holds — purchased in an era of near-zero rates — which generated only $158.8 billion in 2024.
The result is a negative gap of nearly $70 billion, to which the Federal Reserve System’s operating expenses (between $5 and $10 billion annually) must be added. In essence, the Fed is paying high interest on liabilities it created itself, while the underlying assets continue to yield much less. It is, therefore, a direct — though temporary and accounting — cost of transitioning from an ultra-expansive to a strongly restrictive monetary policy.
Unrealized Losses: A Trillion Dollars on Paper
In addition to operating losses, the Fed must contend with unrealized losses that, as of December 31, 2024, amounted to $1.06 trillion, up from $948 billion at the end of 2023. These represent the difference between the purchase price of the securities and their current market value, which has plunged due to higher interest rates.
It is important to stress that these are “on-paper” losses: by holding the securities to maturity, the Fed will recover their full nominal value, and the losses will disappear. So, no problem? Not exactly — someone must bear the consequences in the meantime. That someone is the U.S. Treasury.
The Impact on the Treasury: A Golden Stream Dried Up
The most tangible consequences of the Fed’s losses appear on the U.S. Treasury’s balance sheet. By law, the Federal Reserve must remit all excess profits to the Treasury after covering operating expenses and paying statutory dividends to its shareholders (the member banks of the system). These transfers, known as remittances, have been a major source of income for the federal government in recent decades.
The numbers are striking: between 2011 and 2021, the Fed transferred about $920 billion to the Treasury — an average of nearly $80–90 billion per year. In 2021 alone, the record year, remittances reached $107.4 billion. These funds accounted for 0.2% to 0.6% of U.S. GDP and up to 3.4% of total federal revenues.
However, since September 2022, when operating losses began, remittances have completely stopped. In 2023 and 2024, the Treasury did not receive a single dollar from the Fed. This interruption represents a loss of income that, under normal circumstances, would have helped reduce the federal deficit.
The Fed’s Accounting Trick: The “Deferred Asset”
How can the Federal Reserve continue to operate despite losses that far exceed its own capital?The answer lies in a special accounting convention adopted in 2011, which allows the central bank to record cumulative losses as a “deferred asset” on its balance sheet.
In practice, instead of reducing its capital when it records losses (as any private company would), the Fed creates an asset entry equal to the amount of its cumulative losses. By the end of 2024, this deferred asset had reached over $224 billion, according to the latest estimates.
This accounting maneuver has two main consequences:
The Fed cannot become technically insolvent: it can continue to operate normally, creating the money needed to cover its expenses.
Remittances to the Treasury are suspended until the deferred asset is fully written off: when the Fed returns to profitability, it must first “repay” itself for all accumulated losses before resuming transfers to the Treasury.
Many experts and members of Congress have criticized this practice as an “accounting gimmick” that masks the Fed’s true financial condition and enables off-budget spending with no apparent impact on the official federal deficit.
The Real Impact on the Federal Deficit
Although the Fed’s losses are not formally included in the calculation of the official federal deficit, economists agree that they represent a real cost to taxpayers.The logic is straightforward: if the Fed can no longer transfer $80–100 billion a year to the Treasury, the government must make up for this missing revenue through higher taxes, spending cuts, or additional borrowing.
While the absence of Fed remittances accounts for only 4–5% of the total deficit, in an environment of already strained public finances, every billion counts.
Some analysts estimate that the total cost to taxpayers of the pandemic-era quantitative easing programs could reach $760 billion over a decade — largely due to the suspension of remittances to the Treasury.
When Will Remittances Resume?
Estimates vary, but most analysts expect remittances to resume between 2027 and 2028.According to projections published by the Federal Reserve Bank of New York in 2023, the Fed was initially expected to return to positive net income in 2025 — but as recent data show, the reality is proving quite different.
A U.S. Congressional report (“Federal Reserve: Policy Issues in the 119th Congress”) estimates that remittances will effectively remain at zero until 2027, before gradually resuming thereafter.
Political and Economic Implications
The Fed’s losses have raised questions that go well beyond accounting:
Political: some members of Congress have expressed concern about the Fed’s autonomy, noting that it can operate at a loss for years without direct accountability to elected representatives. There are fears this situation could be used to fund off-budget programs, such as the Consumer Financial Protection Bureau, which receives funding directly from the Fed.
Economic: experts emphasize that these losses are a natural consequence of the monetary policy needed to fight inflation, and not a sign of mismanagement.
Transparency: several economists have called for a reform of the Fed’s accounting conventions.The American Enterprise Institute (AEI), for example, has argued that the Fed’s losses should be explicitly included in the official federal deficit, to ensure greater transparency for taxpayers.
Losses at Commercial Banks: A Parallel Problem
It is also worth noting that U.S. commercial banks have faced substantial unrealized losses on their securities portfolios.According to the Office of Financial Research, as of December 31, 2024, FDIC-insured banks had aggregate unrealized losses of $481 billion, equal to 8.6% of the fair value of their securities portfolios.
This issue contributed to the failure of several regional banks in 2023, including Silicon Valley Bank.The crucial difference is that commercial banks cannot create money to cover their losses — they must maintain sufficient capital to avoid insolvency.
Looking Ahead
Analysts agree that the Fed’s losses are temporary, though prolonged.In the long run, as interest rates normalize and the Fed’s portfolio is renewed with higher-yielding assets, profitability will return.
However, this episode raises serious questions about the structure of the Fed’s balance sheet and the risks inherent in large-scale quantitative easing programs.In the future, the Fed may need to adopt more sophisticated risk management strategies, such as interest rate hedging — though doing so could limit the effectiveness of its unconventional monetary policies.
Conclusions
The Federal Reserve’s losses represent the hidden cost of quantitative easing and the fight against inflation.While public attention rightly focuses on inflation and employment, the fiscal consequences of monetary policy often go unnoticed.
The $240 billion in operating losses, combined with the complete suspension of remittances to the Treasury for the third consecutive year, impose a significant burden on U.S. public finances at a time when both the deficit and public debt are already at historically high levels.
The bad news: American taxpayers will likely have to wait until 2027–2028 before seeing the Fed once again contribute to federal revenues — and even then, remittances will resume only gradually.
This episode underscores the importance of considering all the costs of economic policy — not just the immediate and visible ones.The Fed’s losses may not make newspaper headlines like inflation or unemployment, but they nonetheless represent a real cost ultimately borne by American citizens. Meanwhile, the debate over how to improve transparency and accountability at the Federal Reserve will continue, with proposals ranging from reforming accounting conventions to increasing congressional oversight of the central bank’s balance sheet operations.
