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The Federal Reserve reported a record loss of $114.3 billion in 2023 due to expenses related to managing the U.S. central bank’s short-term interest rate target. This loss followed a net income of $58.8 billion in 2022. Despite the negative income, the Fed has assured that it does not impede its ability to operate or conduct monetary policy. By law, any profits the Fed earns after covering operational expenses are handed over to the Treasury.

The Fed earns income from the services it provides to the financial system and from interest income on securities it owns. In recent years, the Fed has earned significant profits due to low interest rates and large levels of bond holdings. However, the Fed’s decision to aggressively boost the federal funds rate in 2022 has impacted its finances. To combat inflation, the Fed raised the target rate to its current range of 5.25% to 5.5%, resulting in increased interest payouts to banks and other financial firms.

The Fed’s audited interest expenses for banks’ reserve balances reached $176.8 billion in 2023, up significantly from the previous year. Interest payouts from the Fed’s reverse repo facility also increased to $104.3 billion in 2023. Despite these expenses, the income earned from bonds the Fed owns remained largely unchanged at $163.8 billion. The Fed can create money to fund its operations when dealing with operating losses, ensuring that it can continue its operations.

To address the loss, the Fed captures it in an accounting device called a deferred asset, which stood at $133.3 billion at the end of 2023 and has since increased to $157.8 billion. When the Fed returns to profitability, it will use excess earnings to reduce the deferred asset. Once the deferred asset is extinguished, the Fed will resume returning excess profits to the Treasury. Fed officials have noted that it could take years for the Fed to once again return profits to the government.

Despite facing a record loss in 2023, the Fed remains confident in its ability to continue its operations and monetary policy. The central bank’s income and expenses are closely monitored, and the Fed has mechanisms in place to address losses and return to profitability. While the negative income may impact the Fed’s finances in the short term, it does not hinder its ability to fulfill its mandate of stabilizing the economy and promoting growth. The Fed’s commitment to transparency and accountability in its financial operations ensures that it can navigate challenges and continue to serve its vital role in the U.S. financial system.

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