Written by: A. Hamilton

The Federal Reserve announced on Tuesday that it suffered a net negative income of $114.3 billion in 2023. This record loss is directly linked to expenses incurred in managing the central bank's short-term interest rate target. The figures released by the Fed follow a net income of $58.8 billion in 2022.

These audited numbers come after preliminary figures were reported earlier this year, highlighting the severity of the situation. The Federal Reserve has repeatedly emphasized that this net negative income does not hinder its ability to function or conduct monetary policy.

According to the law, any profits generated by the Fed after covering operational expenses are handed over to the Treasury. The central bank earns income from the services it provides to the financial system and from interest income on the securities it owns.

In recent years, the Fed has accumulated significant profits due to historically low interest rates and substantial bond holdings.

However, the Fed's decision to aggressively increase the federal funds rate starting in the spring of 2022 has had a detrimental impact on its finances. To combat rising inflation, the central bank raised the target rate from near-zero levels to the current range of 5.25% to 5.5%, according to Reuters.

Maintaining this target rate involves paying banks, money funds, and other financial firms to keep cash at the central bank, resulting in substantially higher interest payouts.

Last year, the audited interest expenses for banks' reserve balances reached $176.8 billion, a staggering increase of $116.4 billion compared to the previous year. Additionally, interest payouts from the Fed's reverse repo facility rose from $41.9 billion in 2022 to $104.3 billion in 2023, as reported by Bloomberg.

In contrast, the income generated from the bonds owned by the Fed remained relatively stable at $163.8 billion last year, showing little change from 2022.

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While the Federal Reserve can create money to fund its operations in the face of operating losses, it records the loss as a deferred asset in its accounting. As of the end of 2023, the deferred asset stood at $133.3 billion.

However, as of March 20, it had risen to $157.8 billion, and it remains uncertain how much larger it will grow. Once the Fed returns to profitability, it will utilize excess earnings to reduce the deferred asset. Eventually, when the deferred asset is extinguished, the Fed will resume returning excess profits to the Treasury.

Federal Reserve officials have acknowledged that substantial sums have been handed back to the Treasury in recent years. However, a report from the St. Louis Fed last year suggested that it could take several years before the central bank is able to once again return profits to the government.