On Friday, January 12th local time, the Federal Reserve released its preliminary unaudited financial statements for 2023. As the Federal Reserve vigorously supported the economy during the COVID-19, and then aggressively raised interest rates to cope with high inflation, the operating loss of the Federal Reserve last year reached $114.3 billion, the largest loss ever.
The Federal Reserve's revenue after deducting expenses last year was negative $114.3 billion, while this figure was positive $58.8 billion in 2022. It should be noted that these losses will not affect the daily operations of the Federal Reserve.
The Federal Reserve can achieve profitability in the vast majority of cases, and the law requires it to turn over the earnings after deducting operating expenses to the US Treasury. The Federal Reserve stated that its 12 regional federations had operating expenses of $5.5 billion last year.
High interest rates are one of the main reasons for the Federal Reserve's record breaking losses. As one of the ways in which the Federal Reserve implements monetary policy and controls short-term interest rates, it pays interest to banks, financial companies, and other eligible fund managers to deposit cash into the central bank's books.
Starting from March 2022, the Federal Reserve will raise interest rates at the fastest pace in nearly 40 years, raising the target range of the federal funds rate to 5.25% to 5.5%.
Affected by a significant increase in interest rates, the Federal Reserve paid $281.1 billion to financial institutions last year, compared to $10.4 billion in 2022. At the same time, the total bond interest held by the central bank last year was $163.8 billion, compared to $170 billion in 2022.
In the first nine months of 2022, the Federal Reserve transferred $76 billion in revenue to the Treasury. In September of the same year, the Federal Reserve began to incur losses and recorded $16.6 billion in deferred assets at the end of 2022. The Federal Reserve's deferred assets increased by $116.4 billion last year, bringing its cumulative total to $133 billion (as of the end of 2023).
When the Federal Reserve no longer incurs losses, it needs to clear all deferred assets before resuming revenue payments to the Treasury.
The timing of the Federal Reserve's return to profitability depends on when it begins to cut interest rates. The market currently generally expects that the Federal Reserve has ended this round of interest rate hikes and will begin cutting interest rates in March.