The Federal Reserve has reported an operating loss for the third year in a row, with cumulative losses surpassing $200 billion. On Wednesday, March 25, the Fed released its audited financial statements for 2025, revealing that the central bank incurred an operating loss of $18.7 billion last year. This figure is significantly lower than the losses recorded in the previous two years—$114.3 billion in 2023 and $77.6 billion in 2024.
The Fed's profit and loss dynamics primarily stem from earning interest income on assets such as Treasury securities and mortgage-backed securities, while being obligated to pay interest on reserves held by commercial banks. When interest expenses exceed interest earnings, an operating loss occurs.
Since 2022, the Fed has aggressively raised interest rates to combat high inflation, leading to a situation where the interest paid on bank reserves has consistently exceeded the income generated from its bond portfolio. Currently, the Fed pays an interest rate of 3.65% on approximately $3 trillion in reserves, compared to a rate of 4.4% on $3.4 trillion in reserves one year earlier.
The persistent losses have increased the Fed's "deferred asset," which grew from $216 billion in 2024 to $243.5 billion in 2025. A projection from the New York Fed last year indicated that the central bank is expected to return to profitability this year and could eliminate its deferred asset balance by 2030.
It is important to note that these losses do not impact the Fed's day-to-day operations. The institution does not require congressional appropriations nor does it rely on funding from the Treasury Department. When the Fed returns to profitability, it will first use earnings to reduce the deferred asset balance before resuming remittances to the U.S. Treasury.
Deferred Asset: A Unique Self-Funding Mechanism Unlike other federal agencies, the Federal Reserve does not need to seek funding from Congress to cover its losses.
In 2022, the Fed established an internal mechanism known as the "deferred asset," which functions essentially as an IOU to itself.
When the Fed's expenses exceed its income, resulting in a net loss, it employs a unique accounting method because, as a central bank, it lacks the capital structure of a typical corporation. It cannot record "negative net worth" or "losses carried forward to equity" like commercial banks do.
Instead, the loss is recorded as a "deferred asset." This deferred asset represents historical losses that must be offset by future profits. It is not a tangible asset but an accounting placeholder used to balance the balance sheet and ensure the Fed continues to operate within its legal framework.
Under the current arrangement, once the Fed returns to profitability, it will first apply earnings to repay this deferred asset. Only after the deferred asset is fully eliminated will the Fed resume its practice of remitting profits to the Treasury Department.
Prior to this period of losses, the Fed had been a significant contributor to the Treasury. Between 2012 and 2021, the Fed remitted a total of more than $870 billion to the Treasury, including $109 billion in 2021 alone.