The Aftermath of Rate Hikes: The Federal Reserve Has Suffered Losses for Three Consecutive Years

Since 2022, the Federal Reserve has aggressively raised interest rates to combat high inflation, and the side effects have already become apparent. Data shows that the Federal Reserve recorded an operating loss of $18.7 billion in 2025, marking its third consecutive year of losses. However, as monetary policy gradually shifts, related pressures are easing.

On March 25, local time, the audited financial statements disclosed by the Federal Reserve showed that its operating loss in 2025 was $18.7 billion, marking its third consecutive year of losses. However, compared to the $114.3 billion loss in 2023 and the $77.6 billion loss in 2024, the scale has significantly narrowed, indicating that its financial situation is gradually improving with changes in the interest rate environment.

As a self-financing central bank, the Federal Reserve does not need to request funds from the Treasury to cover losses, so the book loss does not affect its daily operations. From an operational perspective, the Federal Reserve primarily generates income by holding government bonds and government-sponsored mortgage-backed securities, while needing to pay interest on reserves held by commercial banks in their accounts. When interest expenses exceed asset income, operating losses occur.

The consecutive losses over the past three years are essentially the “side effects” of the aggressive interest rate hikes implemented since 2022 to combat high inflation. Against the backdrop of rapidly rising interest rates, the Federal Reserve significantly increased the interest rate on reserve payments, leading to a rapid rise in liability costs, while the adjustment of asset income lagged behind, creating an “inversion.”

However, profit itself is not a policy goal for central banks. Before 2022, the Federal Reserve maintained profitability for a long time and transferred surpluses to the Treasury after deducting operating costs. From 2012 to 2021, it cumulatively transferred profits exceeding $870 billion, with a single-year transfer of $109 billion in 2021 alone.

To address the losses, the Federal Reserve introduced “deferred assets” as an internal accounting tool in 2022, effectively postponing current losses to be offset against future profits. With the continued losses in 2025, the scale of deferred assets has expanded from $216 billion in 2024 to $243.5 billion. This means that even if profitability is restored in the future, the Federal Reserve must first make up for this “historical deficit” before it can resume transferring profits to the Treasury.

It is worth noting that as monetary policy gradually shifts, related pressures are easing. Over the past year, the Federal Reserve has begun the process of lowering interest rates, and the gap between its asset income and interest expenses has significantly narrowed. Currently, the interest rate on approximately $3 trillion in reserves is 3.65%, down from 4.4% on $3.4 trillion in reserves a year ago. The New York Fed previously predicted that the Federal Reserve is likely to return to profitability within the next one to two years and may gradually eliminate deferred assets by the end of this decade.

The consecutive losses could still trigger political concerns. According to disclosed meeting minutes, Federal Reserve officials privately expressed worries at the beginning of the interest rate hike cycle that rapid rate increases could lead to losses in their securities holdings, potentially provoking political backlash.

Previously, President Trump criticized the Federal Reserve’s mismanagement over a $2.5 billion cost overrun for renovations of two historic buildings at its headquarters, and expressed dissatisfaction with its failure to lower interest rates more quickly. This controversy even became a basis for a federal criminal investigation against Federal Reserve Chairman Powell.

The Federal Reserve also has the responsibility to provide funding support for the Consumer Financial Protection Bureau, a setup that originated from the Obama administration’s Dodd-Frank Wall Street Reform and Consumer Protection Act. The Trump administration had argued in court that the Fed should not continue to provide funds to this agency in the absence of profits, but a federal court rejected this claim last December.