By Michael S. Derby
March 25 (Reuters) – The U.S. Federal Reserve reported a much narrower loss last year in an audited financial statement released on Wednesday, as its balance sheet contracted and it benefitted from a drop in interest expenses.
The Fed said that its total comprehensive loss for the full year of 2025 stood at $19.6 billion, compared with losses of $77.5 billion in 2024 and $114.6 billion in 2023. The Fed last turned a profit in 2022 and returned $76 billion to the government that year, down from $109 billion in 2021.
The Fed’s losses are tied to the aftermath of the monetary policy path pursued during the COVID-19 pandemic. Then, the Fed bought Treasury and mortgage bonds aggressively to both stabilize troubled financial markets and to provide economic stimulus when its interest rate target was at near zero levels and could be trimmed no further.
The Fed earns income from bonds it owns and from services it provides to the financial sector. For most of the Fed’s history, that earned the central bank substantial amounts of money, and by law, any money left over after the Fed covered its operations was handed back to the Treasury.
The Fed’s bond-buying upended that relationship after the central bank began raising interest rates to combat inflation in 2022, as money the Fed paid out to financial institutions to keep its interest rate target in line shifted to exceed the income from bonds and services.
In 2025, the Fed reported $12.1 billion in interest rate expenses, down from $68 billion in 2024.
Pressure on the Fed’s bottom line has been easing due to rate cuts that kicked off in 2024, taking the federal funds rate from the recent peak of between 5.25% and 5.5% to the current level of 3.5% to 3.75%.
PATH BACK TO PROFITABILITY
The Fed has stressed that profits and losses on its activities do not have any bearing on its ability to conduct monetary policy.
The Fed accounts for its losses by recording what is called a deferred asset. Once that tally is covered, the Fed has said it will again return excess profits to the Treasury.
The current size of the Fed’s deferred asset stands at $245 billion and its movement over recent months indicates that the Fed is back to profit-making, albeit at a very modest level. Analysts generally agree it will take the Fed years to fully extinguish the deferred asset.
POLITICAL TENSIONS
The losses have played a peripheral role in some of the tensions around cost overruns of the Fed’s headquarters in Washington, a matter that became a major flashpoint between the central bank and the Trump administration, as the Department of Justice launched a criminal probe.
Beyond that, the Fed’s losses did briefly give flight to a push in Congress to alter the Fed’s rate control toolkit, which in theory would have reduced the interest payments it had been making to financial institutions.
Top Fed officials and many private sector analysts warned that tinkering with the Fed’s rate control toolkit could create a violent market reaction, and the effort seems to have ended.
That said, the nomination of Kevin Warsh to succeed current Chair Jerome Powell, whose term as Fed leader ends in May, could bring big changes to the way the Fed deals with its holdings of bonds and manages interest rates.
Warsh has expressed interest in a much smaller balance sheet and some in the Fed have talked about how regulatory changes that reduce financial firms’ need to hold liquidity could allow the central bank to have a smaller footprint in markets.
(Reporting by Michael S. Derby; Editing by Chizu Nomiyama and Andrei Khalip)
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