The cost of high interest rates? The Federal Reserve has incurred losses for three consecutive years, with total losses exceeding $200 billion.

Ask AI · How does the Federal Reserve’s deferred asset mechanism balance massive losses?

The Federal Reserve has reported operational losses for the third consecutive year, with cumulative losses exceeding $200 billion.

On Wednesday, March 25, the Federal Reserve released its audited financial statements for 2025, showing that the central bank recorded an operational loss of $18.7 billion last year. This figure is significantly lower than the previous two years, with losses of $114.3 billion in 2023 and $77.6 billion in 2024.

The logic behind the Federal Reserve’s profits and losses mainly lies in its assets, which consist of government bonds and mortgage-backed securities that earn interest income, while liabilities require interest payments on reserves held at commercial banks. When the latter exceeds the former, operational losses occur.

Since 2022, the Federal Reserve has significantly raised interest rates to curb high inflation, leading to interest payments on reserves to banks consistently exceeding its bond investment income. Currently, the Federal Reserve pays an interest rate of 3.65% on approximately $3 trillion in reserves, compared to 4.4% on $3.4 trillion in reserves a year ago.

The continued expansion of losses has increased the Federal Reserve’s “deferred assets” from $216 billion in 2024 to $243.5 billion in 2025. The New York Fed’s forecast last year indicated that the Federal Reserve is expected to return to profitability this year and may eliminate deferred assets by 2030.

It is worth noting that the aforementioned losses do not affect the Federal Reserve’s daily operations. The institution does not need to seek appropriations from Congress, nor does it rely on the Treasury for capital infusions, as it will prioritize repaying deferred assets with future profits before remitting profits to the U.S. Treasury.

Deferred assets, a unique self-replenishing mechanism

Unlike other federal agencies, the Federal Reserve does not need to seek funding from Congress to cover losses.

In 2022, the Federal Reserve established an internal mechanism called “deferred assets,” which is essentially an IOU it issues to itself.

When the Federal Reserve’s expenses exceed its income, resulting in a net loss, it cannot record “negative net assets” or “loss carryforwards to equity” like commercial banks, due to its status as a central bank without the typical capital structure of ordinary businesses.

Therefore, it employs a unique accounting method to record the losses as “deferred assets.” These “deferred assets” actually represent historical losses that need to be offset by future profits.

They are not real assets, but rather an accounting expedient used to balance the balance sheet and ensure the Federal Reserve continues to operate within the legal framework.

Under current arrangements, the Federal Reserve will first repay these deferred assets with future profits, and only after they are fully cleared will it resume the practice of remitting profits to the Treasury.

Prior to this, the Federal Reserve was a significant “contributor” to the Treasury. Between 2012 and 2021, the Federal Reserve remitted over $870 billion to the Treasury, with $109 billion in just 2021 alone.