The Federal Reserve is finally showing signs of emerging from the deep losses it has suffered since 2022, with the latest data showing the central bank’s intangible assets have begun to shrink since early November. The assets, which measure the amount of accumulated losses that need to be absorbed before the Fed can return to handing out profits to the Treasury, have fallen slightly to $243.2 billion.
Analysts say the Fed now has the potential to generate more than $2 billion in profit this quarter as interest payments to banks are reduced as interest rates are cut. The previous losses were the result of a combination of holding $9 trillion in bonds during the pandemic and aggressive interest rate hikes in 2022–2023 that created a negative carry.
The interest rate cuts since October have reduced the cost of paying out to banks and stopped the Fed’s losses, with analysts seeing signs that the earnings mismatch has ended. Some economists expect a full recovery to take years before the Fed returns to paying dividends to the US Treasury.
While the Fed's losses do not affect its ability to conduct monetary policy, the issue of interest payments to banks required to maintain short-term rates has sparked political criticism that they act as a subsidy to the financial sector.
With market yields now above the IORB rate, analysts expect the Fed to move towards a net profit. However, the timing of a full recovery depends on the direction of Fed policy, including the possibility of additional rate cuts that are being considered due to concerns about the jobs market.
