The Federal Reserve has begun to slowly reverse the financial losses it has sustained over the past three years due to measures taken during the COVID-19 pandemic. Recent data released by the Fed indicates a slight but notable decline in its deferred asset since early November.
From November 5 to November 26, the size of the Fed’s deferred asset fell from $243.8 billion to $243.2 billion. Though the decrease is small, it marks a shift in trend, suggesting the central bank has returned to generating a modest profit after a prolonged period of loss-making.
The deferred asset is an accounting tool that tracks losses the Fed must cover before it can resume transferring surplus earnings to the U.S. Treasury. The Fed typically funds its operations through income from assets such as Treasury and mortgage-backed securities, along with fees for services it provides to the financial system. Any residual income has historically been returned to the federal government.
However, during the COVID-19 crisis, the Fed expanded its balance sheet significantly—buying large quantities of bonds to lower long-term interest rates and support the economy—which caused its total holdings to exceed $9 trillion by mid-2022. When inflation rose sharply in early 2022, the Fed had to increase short-term interest rates quickly. As a result, what it paid on bank reserves and other liabilities exceeded what it earned from its existing bonds, creating ongoing losses that started in September 2022.
The recent improvement aligns with the Fed’s reduction in interest rates, lowering the cost of managing those liabilities. The current target range for the federal funds rate is 3.75% to 4%, down from a peak of 5.25% to 5.5% earlier in 2023, and more cuts may be forthcoming as labor market concerns persist.
Bill Nelson, chief economist at the Bank Policy Institute and a former senior Fed staffer, told Yahoo Finance, “By tracking the financial performance of the regional Fed banks, the Fed appears to be on track for the combined profits of the 12 Reserve Banks to be over $2 billion in the current quarter.”
Economists estimate that although the deferred asset is shrinking, it may still be years before it is fully repaid, allowing the central bank to resume remittances to the Treasury.
