Jai Kedia
Jai Kedia

The Fed’s audited financial statements for 2024 show that it suffered operating losses of $77.6 billion. That’s on the heels of losing $114.3 billion in 2023, for a two-year total of $191.9 billion. The culprit of these losses? The large amounts of interest it pays on bank reserves.
The Fed drastically changed its operating framework during the financial crisis of 2008. At the time, most of the attention fell on the Fed’s quantitative easing program. But the size of the Fed’s emergency lending programs dramatically inflated aggregate reserves, prompting the Fed to begin paying commercial banks interest on reserves. At that time, interest rates were relatively low. But as many pointed out, unless the Fed shrunk the pool of reserves, interest rates would eventually rise and put the Fed in a political pickle.
Well, that time is finally here.
As Figure 1 shows, the Fed’s interest payments have increased exponentially. (All dollar values have been adjusted for inflation by converting to their equivalent in 2024 dollars.) Moreover, the rate of increase in interest expenses closely mirrors the rate of increase in the rate the Fed pays out on the reserves (the “IOR” rate). This latter fact was not true in the late 2010s when the Fed raised the IOR but kept interest payments in check because it only paid interest on excess not all reserves, a policy it changed during the pandemic.

Figure 1: Fed’s Inflation-Adjusted Interest Expenses vs. Interest Rate Paid on Reserves, Annual

As Figure 2 shows, these large interest expenses resulted in the Fed’s only recorded losses since 2008 and the only losses on record since the data became available. The Fed has mostly hand-waved these losses away and used financial gimmickry to label them “deferred assets” that they have promised to balance with future profits.  » Read More
https://www.cato.org/blog/feds-ior-gamble-results-second-straight-year-operating-losses