According to audited financial results released Tuesday, the Federal Reserve faced a staggering $114.3 billion net loss in 2023. 

This record-breaking deficit stems directly from the U.S. central bank’s aggressive interest rate hikes to combat stubborn inflation.

________________________________________________________________________

• The Federal Reserve posted a record $114.3 billion net loss in 2023.

• Rising interest expenses drove this massive loss from hiking rates to fight inflation.

• Despite the record deficit, the Fed can still operate normally and conduct monetary policy.

________________________________________________________________________

The Federal Reserve Posts Record $114.3 Billion Loss in 2023

The Fed’s 2023 Loss Dwarfs 2022’s $58.8 Billion Profit

The central bank’s $114.3 billion net negative income in 2023 starkly contrasts its $58.8 billion net profit in 2022. 

While these numbers are eye-popping, the Fed has repeatedly reassured that operating at a loss does not impair its ability to conduct monetary policy effectively.

How Did the Fed Rack Up Such Massive 2023 Losses?

Understanding how the Fed manages the money supply is important to understanding why it had losses in 2023.  

When the Fed raises interest rates to slow down the economy, it pays banks and other institutions to hold money at the central bank. 

In 2023, these interest payments totalled $176.8 billion because of the high Fed funds rate.  

Also, in 2023, the Fed paid $104.3 billion in interest on its reverse repo facility, more than the $41.9 billion it paid in 2022. 

Meanwhile, the Fed made $163.8 billion in interest from its bond investments, about the same as the year before.

The Bottom Line: Fed Can Still Operate Despite Record 2023 Loss

While $114.3 billion in net negative income is unprecedented for the Federal Reserve, it does not prevent the central bank from operating normally. 

The Fed can create money to fund deficits, recording losses as a “deferred asset” on its balance sheet.

This deferred asset hit $133.3 billion by year-end 2023 and had grown to $157.8 billion as of March 20th. 

The Fed will use future profits to reduce this deferred asset over time before remitting excess earnings to the U.S. Treasury again.

Fed officials have noted they returned substantial sums to the Treasury in recent decades when policy rates were lower. 

While it may take years to become profitable again, the Fed’s 2023 losses pose no threat to achieving its monetary policy mandate.