The Federal Reserve recently disclosed its preliminary income and expenses for 2023, revealing an unprecedented $114.3 billion in operational losses. Somewhat surprisingly, Fed officials seem unconcerned about this financial performance. Their lack of concern may be even more worrisome than the losses themselves. Like any financial institution, the Fed receives revenue from the financial assets it holds and it must pay interest on its financial liabilities. Arguably, the last round of QE played a role in setting up current Fed losses.
One key aspect of the Federal Reserve Act is its obligation to remit its profits to the US Treasury. When the Fed experiences losses, however, it doesn’t lead to the Treasury cutting a check. Instead, the Fed issues an IOU known as “deferred assets,” essentially monetizing its own deficits. Moving forward, the Fed will use future profits to offset these deferred assets before resuming regular remittances to the Treasury.