The Fed Is Turning the Corner on Profits. It’s Good for the Treasury.

Stephen Miran, who became a Fed governor in September, joked about how his arrival has helped the bank with its profits. (Michael Nagle / Bloomberg)

Key Points

• The Federal Reserve recorded operating losses of $114.3 billion in 2023 and $77.6 billion in 2024, with a $20.8 billion loss through September this year.
• These losses stem from increased interest payments on reserves and cash parked at the bank.
• The Fed’s deferred asset, representing cumulative losses, currently stands at negative $243.4 billion, but is showing signs of improvement.

Everyone knows that the Federal Reserve made borrowing more expensive when it raised interest rates to fight inflation. Yet little attention is paid to the tide of red ink that higher rates brought to the bank itself.

It is time to look under the hood because there are signs that the central bank’s books may be improving. That would put the Fed, now under political pressure, in a better light. It could also help the Treasury in years to come.

The Fed, the most powerful central bank in the world, has recorded significant losses. It logged a record $114.3 billion operating loss in 2023 and followed that up with a $77.6 billion loss in 2024. So far this year, it had lost $20.8 billion as of the end of September.

All that marks a reversal for the bank, which almost always logged annual profits until 2022.

The losses accrued as the Fed kicked off its campaign to fight inflation by raising interest rates, including on funds held at the bank. At one point in 2023, it was paying 5.4% on the reserves banks kept at the Fed. The rate was more than 5% on excess cash that money-market funds parked at the Fed that year.

Those interest costs, plus the bank’s own expenses, surpassed the cash it earned from its portfolio of securities, some of which were purchased when interest rates were far lower. In the pandemic, when the Fed aggressively bought debt in an effort to prop up the economy, yields on 10-year notes were less than 1%.

But unlike for ordinary businesses, the losses are no biggie for the Fed. They don’t affect its day-to-day operations, ability to conduct monetary policy, or meet its financial obligations. The Fed simply creates money needed to meet expenses, logging its cumulative losses as what it calls a deferred asset. It currently stands at negative $243.4 billion, compared with negative $20 billion in 2023.

“Inside the Fed we used to call [it] the ‘magic asset,’” wrote Bill Nelson, chief economist at the Bank Policy Institute, in a post on LinkedIn. He worked at the Fed for more than two decades before joining the institute.

So where’s the problem? One issue lies in the optics. The central bank is now in the line of fire from President Donald Trump.

“Public misunderstanding of these losses could complicate communication and erode support for the Fed’s independence,” wrote Asher Rose, a former research analyst at the Peterson Institute for International Economics, this summer.

A bigger problem lies in a law that has required the Fed to turn over its excess earnings to the U.S. Treasury since 1947. Between 2011 and 2021, the Fed paid the Treasury more than $920 billion in total, but the big checks stopped coming when the bank started losing money. When the Fed’s net income turns positive, it will pay down the deferred-asset value until it reaches zero, and then resume sending money.

More money from the Fed could make it easier for the Treasury to handle its immediate cash needs. It could even mean a bit less issuance of debt.

In February, the Fed said “net income is expected to turn positive again as interest expenses fall.” It may not take too long. The year-to-date loss through the end of September was only about one-third of the total as of September 2024.

The deferred-asset account has improved $39 billion since Oct. 8. That is because even though the Fed as a whole is losing money, a few regional Fed banks are in the black. They are sending money to the Treasury when their own weekly net income is positive.

The Atlanta Fed has been sending money to the Treasury since March 2024. The St. Louis Fed has intermittently made payments since early this year, and cumulative losses at the Philadelphia, Cleveland, and New York Fed banks have stabilized.

Created with Highcharts 9.0.1Remittances to the Treasury from the Atlanta Fed.Source: Federal Reserve via St. Louis Fed

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The picture is improving rapidly at the Dallas Fed. Its cumulative loss was $199 million as of Nov. 19, compared with $1.4 billion at the start of the year.

By Nelson’s estimates, the Fed could have a profit of $1.9 billion through the end of the year. It could be considerably higher in the first quarter of next year, he said.

That positive news elicited a remark from Stephan Miran, the newly appointed Fed governor, who commented on Nelson’s LinkedIn post, saying “I do quick work (just kidding)”

Further rate cuts, which Miran favors, could move the bank toward profitability even faster. Whether that worsens inflation is another story.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.